On July 19, 2023, a federal district court held in Ultima Servs. Corp. v. United States Dep’t. of Agriculture, No. 2:20-CV-00041 (E.D. Tenn.), that certain racial preferences in government contracting violate constitutional guarantees of equal protection.  The case appears to be the first federal decision that extends Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina (“SFFA”) to the government contracting context. Although the case has no precedential effect and does not address the legality of private entities’ use of racial preferences in procurement decisions or otherwise, future courts might apply Ultima’s reasoning to Section 1981 cases that challenge private companies’ efforts to diversify their supply chains.

A. Background

Section 8(a) of the Small Business Act instructs the Small Business Administration (the “Administration”) to contract with other agencies “to furnish articles, equipment, supplies, services, or materials to the Government, or to perform construction work for the Government.”  15 U.S.C. § 637(a)(1)(A) (the “8(a) program”).  The Administration is further authorized to “arrange for the performance of such procurement contracts by negotiating or otherwise letting subcontracts to socially and economically disadvantaged small business concerns.”  15 U.S.C. § 637(a)(1)(B).  A “socially and economically disadvantaged small business concern” is one that is majority-owned by “socially disadvantaged individuals”—”those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.”  Id. § 637(a)(4)-(5).  The Act vests the Administration with authority to determine “whether a group has been subjected to prejudice or bias.”  Id. § 637(a)(8).

Acting pursuant to this authority, the Administration adopted a regulation, creating a “rebuttable presumption” that “Black Americans; Hispanic Americans; Native Americans … Asian Pacific Americans … [and] Subcontinent Asian Americans” are “socially disadvantaged.”  13 C.F.R. § 124.103(b)(1).  Thus, businesses owned by members of these racial minorities are presumptively entitled to participate in the 8(a) program.  Plaintiff Ultima, a small business owned by a white woman, filed suit, alleging that it was able and willing to perform on contracts set aside for the 8(a) Program, but was ineligible to do so because of the race of its owner.

B. Analysis

1. The District Court’s opinion

The court held that the 8(a) program violates the equal-protection component of the Fifth Amendment.  The court determined that Ultima had standing “because in equal protection cases, the injury-in-fact is the denial of equal treatment resulting from the imposition of the barrier, not the ultimate inability to obtain the benefit.”  This injury was redressable because a ruling prohibiting the Administration “from using the rebuttable presumption based on race would remove the race-based barrier that injures Ultima.”

The court then held that the 8(a) program failed to satisfy strict scrutiny.  First, the Administration did not assert a compelling interest supporting the program’s racial classification.  Quoting SFFA, the court reasoned that while the government “has a compelling interest in remediating specific, identified instances of past discrimination that violated the Constitution or a statute,” it also “must present goals that are sufficiently coherent for purposes of strict scrutiny.”  But according to the court, “[t]he 8(a) program suffered a fatal lack of any stated goals.”  For example, the Administration did “not identify a specific instance of discrimination” that it sought to remedy via the rebuttable presumption.  Although the government argued that the rebuttable presumption was necessary “to remedy the effects of past racial discrimination in government contracting,” the court held that the government was just a “passive participant in such discrimination in the relevant industries in which Ultima operates” and did not “allow[] discrimination to occur in the industries relevant to Ultima.”  Additionally, the Administration did “not examine whether any racial group is underrepresented in a particular industry relevant to a specific contract in the 8(a) program” and therefore could not “measure the utility of the rebuttable presumption in remedying the effects of past racial discrimination,” as the court believed to be required by SFFA.

Second, the court held that even if the Administration had a compelling interest in remediating specific past discrimination, the 8(a) program was not narrowly tailored to combatting discrimination.  The court reasoned that SFFA “reaffirms that racially conscious government programs must have ‘a logical end point,’” but that the 8(a) program “has no termination date.”  Further, the court believed the 8(a) program to be both underinclusive and overinclusive.  It was underinclusive, the court reasoned, because it used what SFFA referred to as “imprecise” racial categories to determine “who qualifies for the rebuttable presumption”; the program excluded “Central Asian Americans and Arab Americans [who] have faced significant discrimination,” and viewed “Hasidic Jews who have faced similarly appalling discrimination [as] ineligible for the rebuttable presumption.”  The court perceived the program to be overinclusive because it “swe[pt] broadly by including anyone from the specified minority groups, regardless of the industry in which they operate.”  The court therefore enjoined the Government from using the rebuttable presumption of social disadvantage in administering the SBA’s 8(a) program.

2. Existing law governing contracting-discrimination claims against private companies

42 U.S.C. § 1981 (“Section 1981”) prohibits racial discrimination in making and enforcing contracts.  To prevail on a Section 1981 claim, a plaintiff must satisfy three elements.  First, he must show that the defendant intended to discriminate on the basis of race.  Second, he must demonstrate that the racial discrimination “interfered with a contractual interest,” Denny v. Elizabeth Arden Salons, Inc., 456 F.3d 427, 435 (4th Cir. 2006)—for example, that there was a “refusal to enter into a contract with someone” on the basis of race, or an “offer to make a contract only on discriminatory terms,” Patterson v. McLean Credit Union, 491 U.S. 164, 176–77 (1989).   See also, e.g., Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470, 476 (2006) (Section 1981 “offers relief when racial discrimination blocks the creation of a contractual relationship, as well as when racial discrimination impairs an existing contractual relationship.”).  Third, a plaintiff must establish that race discrimination was a “but-for” cause of his injury.  Comcast Corp. v. Nat’l Ass’n of African Am.-Owned Media, 140 S. Ct. 1009, 1019 (2020).

A defendant can defeat a Section 1981 claim by demonstrating that it acted pursuant to a valid affirmative-action plan.  See, e.g., Johnson v. Transportation Agency, Santa Clara County, California, 480 U.S. 616, 626–27 (1987); see also, e.g., Doe v. Kamehameha Sch./Bernice Pauahi Bishop Estate, 470 F.3d 827, 836–40 (9th Cir. 2006) (en banc) (applying Johnson in Section 1981 case).  A valid affirmative-action plan must be remedial in nature, and must rest “on an adequate factual predicate justifying its adoption, such as a ‘manifest imbalance’ in a ‘traditionally segregated job category.’”  Shea v. Kerry, 796 F.3d 42, 57 (D.C. Cir. 2015) (quoting Johnson, 480 U.S. at 631) (alteration omitted).

C. Implications for Section 1981 cases 

Ultima was not a Section 1981 case.  Indeed, in Ultima, the court dismissed the plaintiff’s Section 1981 claim because the statute does not apply to the federal government.  As a result, Ultima does not change existing law governing private actors’ use of racial preferences in awarding contracts.  Nevertheless, the case suggests that some federal courts will be receptive to challenges to other uses of racial preferences in government contracting, like state and local set-aside programs and requirements that contractors employ a certain number of minority employees.  In addition, courts have held that “purposeful discrimination that violates the Equal Protection Clause also will violate § 1981.”  Anderson v. City of Boston, 375 F.3d 71, 78 n.7 (1st Cir. 2004); see also Dunnet Bay Const. Co. v. Borggren, 799 F.3d 676, 696 (7th Cir. 2015) (“Racial discrimination by a recipient of federal funds that violates the Equal Protection Clause also violates Title VI and § 1981.”).  Ultima therefore suggests that some future courts could hold that Section 1981 prohibits private companies that seek to diversify their supply chains from implementing plans similar to the 8(a) program.

Additionally, Ultima includes a footnote, in which the court observes that while “[t]he facts in Students for Fair Admissions, Inc. concerned college admissions programs … its reasoning is not limited to just those programs.”  Ultima applied SFFA to a government contracting program, and a future court could apply the same reasoning to bring challenges to employer or corporate programs under Section 1981, Title VII, and other anti-discrimination statutes.  That said, the precedential effect of Ultima is limited, and the decision could be overturned on appeal.  In the meantime, Ultima could represent another sign of an increasing trend towards reverse-discrimination claims in employment and contracting.

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The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Molly Senger, Zakiyyah Salim-Williams, Mylan Denerstein, Dhananjay Manthripragada, Lindsay Paulin, Matt Gregory, and Josh Zuckerman.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment or Government Contracts practice groups, the authors, or the following practice leaders and partners:

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group, New York
(+1 212-351-3850, [email protected])

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer, Washington, D.C.
(+1 202-955-8503, [email protected])

Molly T. Senger – Partner, Labor & Employment Group, Washington, D.C.
(+1 202-955-8571, [email protected])

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, [email protected])

Dhananjay S. Manthripragada – Partner & Co-Chair, Government Contracts Group, Los Angeles
(+1 213-229-366, [email protected])

Lindsay M. Paulin – Partner & Co-Chair, Government Contracts Group, Washington, D.C.
(+1 202-887-3701, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

On 13 June 2023, the European Parliament published a draft report[1] (the “Parliament Proposal”) on the proposal made by the European Commission on 7 December 2022[2] (the “Commission Proposal”) which sets out contemplated amendments to the European Market Infrastructure Regulation (“EMIR”).

The Commission Proposal resulted from a targeted review of EMIR, relating in particular to the supervisory arrangements for central counterparties (“CCPs”), which the Commission was required to carry out by 2 January 2023.[3] As part of the standard EU legislative process, it was then up to the Parliament to be involved, which led to the Parliament Proposal.

The primary aim of the changes contemplated by the Commission and the Parliament, referred to as EMIR 3, is to improve the attractiveness and resilience of the EU clearing system and reduce the exposure of EU entities to third-country CCPs. EMIR 3 also draws lessons from some specific issues that became apparent during the recent energy crisis, and includes other targeted modifications of EMIR.

In this context, the Parliament Proposal does entail some key divergences from the Commission Proposal, which this alert outlines.

I. The active account requirement

This is arguably the most impactful and debated provision considered by EMIR 3.

The Commission Proposal included an obligation for financial counterparties (“FCs”) and non-financial counterparties (“NFCs”) subject to the clearing obligation (such NFCs being often referred to as “NFC+s”) to hold active accounts at CCPs established in the EU. It also required these counterparties to clear in such accounts at least a certain proportion of specific systemic derivative contracts, namely:

1. interest rate derivatives denominated in euro and Polish zloty;
2. credit default swaps (“CDS”) denominated in euro; and
3. short-term interest rate derivatives denominated in euro.

The relevant proportion to be cleared at EU CCPs was to be determined by ESMA through regulatory technical standards.[4]

This approach, known as the “quantitative” approach, has been criticized by various market participants, including ISDA,[5] on the grounds that it would prove costly and jeopardize the competitiveness of EU firms.

Taking these concerns into account, the Parliament Proposal maintains the active account requirement, but provides for it to be gradually phased-in with a two-step approach.

1. During the first phase, the quantitative approach would be replaced with a qualitative one. EU counterparties would be required to exchange initial and variation margins in an account at a EU CCP, and to regularly enter into new positions on that account. ESMA would be charged with establishing the frequency of trading needed for it to be considered “regular”, which could vary depending on the type of entity considered.[6] Eighteen months after the entry into force of EMIR 3, ESMA and the Joint Monitoring Mechanism[7] would produce a report assessing whether such qualitative approach proves sufficient to relocate clearing activities to the EU clearing system and thus protect the stability of the EU financial system.[8]
2. If, at the end of the first phase, the qualitative approach proves not to have been sufficient, then the second, quantitative phase would be implemented and ESMA would determine the proportion of derivative contracts to be cleared in the EU CCPs’ active accounts.[9]

In addition, the Parliament Proposal removes euro-denominated CDS from the list of derivatives subject to the active account requirement and instead refers to other categories of derivative contracts pertaining to clearing services to be identified by ESMA as being of substantial systemic importance.[10]

II. Exemption from reporting obligation for NFC intragroup transactions

In 2019,[11] EMIR was amended to include an exemption from the reporting obligation for over-the-counter derivatives between counterparties within a group, where at least one of the counterparties is a non-financial counterparty and the parent undertaking is established in the EU[12]. The rationale for such exemption was that NFC intragroup transactions were not seen as a posing a significant systemic risk. However, in light of some of the difficulties revealed during the energy crisis, the Commission Proposal removed this exemption to ensure more visibility on NFC intragroup transactions.[13]

The Parliament Proposal considers that such removal of the exemption could be premature, as it would lead to additional burdens for corporate end-users of derivatives, without the potential supervisory upside having been established. Consequently, the Parliament Proposal reinstates the exemption and encourages ESMA to prepare a cost-benefit analysis, before reassessing whether to remove the exemption.[14] We note that other jurisdictions, such as the United States, provide relief for non-financial companies from the reporting of intragroup transactions and that in the UK, any intragroup transaction where at least one counterparty is a non-financial counterparty (or would be qualified as a non-financial counterparty if it were established in the UK) may be exempt from the reporting obligation provided that specific circumstances are met.

III. Margining exemption for single-stock and equity index options

To ensure a level playing field for EU firms and avoid regulatory arbitrage with other jurisdictions where they are exempted from margining requirements (e.g., the United States), temporary exemptions for single-stock and equity index options have been repeatedly extended, so that they would not be subject to initial margin and variation margin requirements under EMIR. The exemption is now set to expire on 4 January 2024. We note that the UK regulators are consulting on extending the UK exemption further until 4 January 2026.

The Parliament Proposal contemplates including in EMIR 3 a phase-in approach in respect of these transactions. The exemption, which would now be directly included in the Level 1 text, would be of a temporary nature. ESMA would monitor the regulatory developments in other jurisdictions and report on them every two years. On the basis of the report, the Commission would determine whether maintaining the exemption is justified. If the Commission concludes that it is not, it will specify the adaptation period at the end of which parties will need to comply with margin requirements in respect of their single-stock and equity index options, such period not to exceed 30 months.[15]

IV. Clearing exemption for transactions resulting from PTRR services

The Parliament Proposal contemplates an exemption to the clearing obligation in respect of transactions resulting from post-trade risk reduction (“PTRR”) services. Such services, which include portfolio compression, portfolio optimisation and rebalancing services, are deemed by the Parliament to reduce systemic and operational risk.[16] To encourage the use of PTRR services, it is thus proposed to exempt from the clearing obligation transactions which result from them (as opposed to the original trades which are the subject of the PTRR services and which would remain subject to the clearing obligation to the extent applicable). However, strict conditions would need to be complied with for the exemption to apply. In particular, the PTRR services must be performed by a provider independent of the market participants, and be a market risk neutral exercise not contributing to price formation. In addition, parties intending to benefit from the exemption must notify their competent authorities thereof.[17]

V. Centralization with ESMA of the supervision of EU CCPs

The Parliament Proposal would empower ESMA with a direct supervisory role with respect to EU CCPs, transferring decision-making authority on many matters from national authorities to ESMA. The aim is, through such centralized supervision, to better monitor clearing services in an increasingly cross-border and interconnected context and reduce the potential differences in the interpretation of EMIR between the Member States.[18]

VI. Equivalence approach in respect of margining requirements

The Commission Proposal removed the equivalence mechanism set out in Article 13 of EMIR in respect of reporting, clearing and margining obligations. This mechanism provided that counterparties were deemed to comply with such obligations as set out in EMIR to the extent that they were already subject to equivalent requirements in the jurisdiction in which they were established. This dealt with duplicative or conflicting rules applicable in different jurisdictions, and thus avoided excessive burdens on participants.

Noting that it had proven useful for market participants, the Parliament Proposal reinstates such equivalence mechanism in respect of the sole risk-mitigation techniques set out in Article 11 of EMIR, in particular the margining obligation.[19]

VII. Reporting by counterparties established outside the EU

The Parliament Proposal extends to counterparties established outside the EU, but belonging to a group subject to consolidated supervision in the EU, the requirement to report to trade repositories the conclusion (i.e. the execution), modification or termination of their derivatives. The stated intention of such change is to cover the offshore activities of EU supervised groups.[20]

VIII. Transparency in respect of clearing costs of CCPs

Under the Parliament Proposal, clearing services providers (whether clearing members or clients) would be required to inform their clients of the costs associated with the clearing services of the different CCPs where clearing of the relevant position is possible.[21]

IX. Transparency and control in respect of risk-mitigation techniques

In this respect, the Parliament Proposal entails two new requirements.

1. FCs and NFCs shall be required to notify the European Banking Authority (“EBA”) and their competent authorities of their initial margin calculation models, at the latest 60 working days prior to first using them. If they find such models not to comply with the applicable conditions, such authorities may object to their use, in which case the relevant entities will be required to cease using them and instead use another model within a year.
2. FCs shall be required to report information on their risk-management procedures (including, where applicable, in relation to the initial margin models used) to the EBA and their competent authorities and disclose key information therein.[22]

X. No prior authorization for CCPs’ “business as usual” changes

Taking one step further the “non-objection procedure” put forward in the Commission Proposal, the Parliament Proposal would create a new subset of “business as usual” changes, which CCPs could make without prior authorization. The changes would, however, be reviewed and reported on by ESMA on a regular basis.[23]

XI. Next steps

As illustrated above, the revisions that may result from EMIR 3 may have broad impacts for EU market participants (and their affiliates), including for non-financial corporates. However, there are still a number of points which require further discussions for a compromise to be reached. The Council, Commission and Parliament will need to engage in further exchanges to ultimately produce an agreed text.

___________________________

[1] https://www.europarl.europa.eu/doceo/document/ECON-PR-749908_EN.pdf.

[2] Available here.

[3] Article 85(7) of EMIR.

[4] Article (I) (4) of the Commission Proposal.

[5] https://www.isda.org/a/a6ygE/ISDA-commentary-EMIR-3.pdf

[6] Amendments 30 to 32 of the Parliament Proposal.

[7] This new mechanism, introduced by the Commission Proposal, is intended to bring together the various bodies involved in the supervision of EU CCPs, clearing members and clients.

[8] Amendment 38 of the Parliament Proposal.

[9] Amendment 38 of the Parliament Proposal.

[10] Amendment 35 of the Parliament Proposal.

[11] Article 1(7) of Regulation (EU) 2019/834.

[12] This need for the parent undertaking to be established in the EU in order to benefit from the exemption has been clarified by the Commission (TR answer 51(m) in ESMA’s Q&A relating to EMIR – available here).

[13] Article (I)(5) of the Commission Proposal.

[14] Amendment 50 of the Parliament Proposal.

[15] Amendment 60 of the Parliament Proposal. It is worth noting that, on 13 June 2023, the EBA, EIOPA and ESMA sent a letter to the Commission, Parliament and Council seeking for a permanent treatment of single-stock and equity index options with respect to margin requirements, indicating that EMIR 3 provides a good opportunity to clarify this issue (available here).

[16] Amendment 3 of the Parliament Proposal.

[17] Amendment 29 of the Parliament Proposal.

[18] Explanatory statement included in the Parliament Proposal.

[19] Amendment 64 of the Parliament Proposal.

[20] Amendment 49 of the Parliament Proposal.

[21] Amendment 42 of the Parliament Proposal.

[22] Amendment 59 of the Parliament Proposal.

[23] Amendment 101 of the Parliament Proposal.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Global Financial Regulatory, Financial Institutions or Derivatives practice groups, or any of the following:

Paris:
Vincent Poilleux (+33 (0) 1 56 43 13 00, [email protected])
Farida Ouriachi (+33 (0) 1 56 43 13 00, [email protected])
Emma Lavaysse di Battista (+33 (0) 1 56 43 13 00, [email protected])

United Kingdom:
Michelle M. Kirschner (+44 (0) 20 7071 4212, [email protected])
Martin Coombes (+44 (0) 20 7071 4258, [email protected])

United States:
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Adam Lapidus – New York (+1 212-351-3869, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome

We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q2 2023. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:

• ALI CLE Holds Annual Accountants’ Liability Conference
• PCAOB Proposes Expansive NOCLAR Auditing Standard
• Supreme Court Holds Section 11 Plaintiffs Must Show They Bought Registered Shares
• Supreme Court Holds States Can Require Corporate Consent to General Jurisdiction
• Australian Government Investigating Accounting Partnerships
• PCAOB Continues China Inspections
• PCAOB Issues Spotlight Report on Professional Skepticism
• Supreme Court Grants Certiorari in Challenge to SEC Administrative Proceedings
• Other Recent SEC and PCAOB Regulatory Developments

Please let us know if there are topics that you would be interested in seeing covered in future editions of the Update.

Read More

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Accounting Firm Advisory and Defense Group:

James J. Farrell – Co-Chair, New York (+1 212-351-5326, [email protected])

Ron Hauben – Co-Chair, New York (+1 212-351-6293, [email protected])

Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])

Michael Scanlon – Co-Chair, Washington, D.C.(+1 202-887-3668, [email protected])

In addition to the Accounting Firm Advisory and Defense Practice Group Chairs listed above, this Update was prepared by David Ware, Timothy Zimmerman, Benjamin Belair, Monica Limeng Woolley, John Harrison, and Nicholas Whetstone.

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

In the current equity capital markets environment, offerings that avoid significant dilution can be advantageous. ATM offering programs provide public companies an efficient means of raising capital over time by allowing them to tap into the existing trading market for their shares on an as-needed basis. Rights offerings allow public companies to raise capital while offering all current shareholders the opportunity to participate equally, thereby allowing shareholders to avoid dilution when trading prices are relatively low.

Please join Gibson Dunn attorneys Boris Dolgonos, Brian Lane, Melanie Neary, and Robyn Zolman in a 60-minute briefing as they discuss recent developments in the uses and structures of ATM programs and rights offerings, including mechanics, advantages and disadvantages, securities law implications and disclosure requirements.

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PANELISTS:

Robyn Zolman is Partner-in-Charge of the Denver office of Gibson, Dunn & Crutcher, where she practices in the firm’s Capital Markets and Securities Regulation and Corporate Governance practice groups. She advises clients with respect to SEC-registered and Rule 144A offerings of investment grade, high-yield and convertible notes, as well as initial public offerings, follow-on equity offerings, at-the-market equity offering programs, PIPE offerings and issuances of preferred securities. Ms. Zolman also regularly advises clients regarding securities regulation and disclosure issues and corporate governance matters, including Securities and Exchange Commission reporting requirements, stock exchange listing standards, director independence, board practices and operations, and insider trading compliance.

Boris Dolgonos is a partner in the New York office of Gibson, Dunn and Crutcher and a member of the Capital Markets and Securities Regulation and Corporate Governance Practice Groups. Mr. Dolgonos has more than 25 years of experience advising issuers and underwriters in a wide range of equity and debt financing transactions, including initial public offerings, high-yield and investment-grade debt offerings, leveraged buyouts, cross-border securities offerings and private placements.  He also regularly advises U.S. and non-U.S. companies on corporate governance, securities laws, stock exchange rules and regulations and periodic reporting responsibilities. Mr. Dolgonos has represented public and private companies, investment banks and other financial institutions and sovereign entities in transactions across North and South America, Europe, Asia and Africa.

Brian Lane, a partner with Gibson, Dunn & Crutcher, is a corporate securities lawyer with extensive expertise in a wide range of SEC issues. He counsels companies on the most sophisticated corporate governance and regulatory issues under the federal securities laws. He is a nationally recognized expert in his field as an author, media commentator, and conference speaker. Mr. Lane ended a 16 year career with the Securities and Exchange Commission as the Director of the Division of Corporation Finance, where he supervised over 300 attorneys and accountants in all matters related to disclosure and accounting by public companies (e.g. M&A, capital raising, disclosure in periodic reports and proxy statements). In his practice, Mr. Lane advises a number of companies undergoing investigations relating to accounting and disclosure issues.

Melanie Neary is an associate in the San Francisco office of Gibson, Dunn & Crutcher. She currently practices in the firm’s Corporate Department. Ms. Neary’s practice is focused on capital markets transactions and mergers & acquisitions and includes representation of clients in connection with corporate governance and Exchange Act reporting matters. Ms. Neary received her J.D. from the University of Michigan Law School in 2016, where she was the Managing Editor of the Michigan Business & Entrepreneurial Law Review. While in law school, Ms. Neary worked in the Transactional Lab and Clinic, advising large organizations around the country and small organizations in the Ann Arbor community on transactional matters.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

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California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Gibson Dunn’s Supreme Court Round-Up provides an overview of cases decided during the October 2022 Term and other key developments on the Court’s docket.  This past Term, the Court heard argument in 59 cases, released 58 opinions, and dismissed one case as improvidently granted.

Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.

To view the Round-Up, click here.

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Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s seven most recent Terms, 11 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 17 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, securities, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 34 petitions for certiorari since 2006.

*   *   *   *

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.

Theodore B. Olson (+1 202.955.8668, [email protected])
Amir C. Tayrani (+1 202.887.3692, [email protected])
Kate Meeks (+1 202.955.8258, [email protected])
Jessica L. Wagner (+1 202.955.8652, [email protected])

On July 19, 2023, the U.S. Federal Trade Commission (FTC) and Department of Justice (DOJ) (collectively, the Agencies) jointly released updated draft Merger Guidelines (Proposed Guidelines) for public comment.[1]  The Proposed Guidelines address horizontal and vertical mergers and reflect the Biden Administration’s competition policy and existing enforcement priorities[2] while providing guidance about the Agencies’ recent efforts to expand the reach of antitrust and fair competition laws.[3]  The Proposed Guidelines will not be formally effective for several months, but, in practice, they already reflect current enforcement policy in reality, and as such are a window into the Agencies’ thinking on competition analysis.

Notable provisions in the Proposed Guidelines that reflect changes from prior agency guidance include: (A) lower market share and concentration thresholds necessary to trigger the structural presumption that a transaction is anticompetitive, (B) de-prioritizing market definition as the starting place for analysis, (C) close scrutiny of transactions that may eliminate potential competition, (D) a framework for analyzing mergers involving multi-sided platforms, (E) a focus on potential harm to rivals, (F) attention to serial or “roll-up” acquisitions, (G) enhanced focus on labor market effects, and (H) expanded use of the FTC’s Section 5 authority.

Overall, the Proposed Guidelines reflect the Agencies’ increased skepticism of the benefits of mergers and acquisitions and a greater willingness to pursue new or revive older theories of competitive harm.

I. Background: The Proposed Guidelines reflect major policy changes.

Historically, the Agencies have jointly issued Guidelines to explain their enforcement policy, most recently in the 2010 Horizontal Merger Guidelines[4] and the 2020 Vertical Merger Guidelines.[5]  In September 2021, the FTC withdrew the Vertical Merger Guidelines in favor of a new set of guidance to be developed with DOJ.[6]  The new Proposed Guidelines touch on both vertical and horizontal merger enforcement.

II. The Proposed Guidelines reflect the Agencies’ current policy of enhanced scrutiny in merger analysis and pursuit of broader enforcement priorities.

The Proposed Guidelines reflect recent trends in merger review, including enhanced Agency scrutiny and expanded theories.  The Proposed Guidelines seek to further these priorities by articulating a range of frameworks that the Agencies may use for assessing a merger’s legality.

A. Lower thresholds to trigger a structural presumption.

The lowering of the quantitative thresholds of market concentration necessary to trigger the presumption that a merger is anticompetitive is one of the most impactful policy changes articulated in the Proposed Guidelines.  As a result of this change, the agencies may use the Proposed Guidelines as grounds to investigate more deeply transactions previously considered low-risk, and to discount pro-competitive features of the industry, regardless of the deal specifics. To apply a structural presumption, however, the Agencies would need to define the relevant market in which to evaluate the competitive effects of a proposed transaction.

While the Agencies have long used market concentration thresholds to guide antitrust analysis in merger review, the Proposed Guidelines utilize lower thresholds and ascribe greater weight to the attendant anticompetitive inferences.[7]  Whereas the 2010 Horizontal Merger Guidelines characterize concentrations of seven competitors of equal share or more (utilizing the Herfindahl-Hirschman Index (HHI) index) as “unconcentrated”, the Proposed Guidelines would seek to label as “concentrated” any market with more concentration than, for example, 10 equal players. The specific proposed interplay of concentration and market shares is illustrated below.

B. Decreased focus on market definition in favor of competitive effects and other evidence.

While the 2010 Horizontal Merger Guidelines relied on market definition to focus the inquiry on the relevant competitive dynamics, the Proposed Guidelines eschew this approach. Instead, the Agencies may avoid defining markets and rely instead on non-traditional evidence, including evidence of competition between the merging parties (irrespective of alternative competitive threats), prior industry coordination (regardless of the parties’ participation), or recent mergers in the same market (regardless of whether prior transactions increased competition).

C. Close scrutiny of transactions that may eliminate potential competition.

 Consistent with the Biden administration’s enforcement program, the Proposed Guidelines endorse an expansive view of the so-called “potential competition” doctrine, which describes transactions that may violate the antitrust laws by eliminating an “actual” or “perceived” potential competitor rather than a current market participant.[8]  Under the Proposed Guidelines, a merger may be illegal where it eliminates “actual” potential competition, i.e., “the possibility that entry or expansion by one or both firms would have resulted in new or increased competition in the market in the future.”[9]  The agencies may also investigate mergers that eliminate “perceived” potential competition, i.e., “current competitive pressure exerted on other market participants by the mere perception that one of the firms might enter.”[10]

The 2010 Horizontal Merger Guidelines neither distinguish between “actual” or “perceived” potential competition nor devote significant time to discussing them as an Agency priority, and the Agencies have found split Circuit opinions on frameworks for “actual” and “perceived” potential competition claims. The Proposed Guidelines set out a detailed framework under the most Agency-favorable Circuit views for analyzing potential competition issues. For example, the Proposed Guidelines suggest that, in challenging a deal that threatens to eliminate an “actual” potential entrant, the Agencies need only show whether one of the merging firms had a “reasonable probability” of entering the relevant market absent the merger.[11]  This standard, while endorsed by some district courts, has been rejected by others (and at one time even the FTC itself) in favor of a more demanding showing of “clear proof.”  Both here and elsewhere in the Proposed Guidelines, the Agencies rely on a generous and often selective reading of the relevant case law.

D. Framework for analyzing platform mergers.

The Proposed Guidelines set forth a framework for analyzing and challenging mergers involving competition between, on and to displace platform businesses (businesses that provide different products or services to two or more different groups or “sides” who may benefit from each other’s participation).  The Proposed Guidelines provide that transactions involving platforms may attract scrutiny if 1) two platform operators are combining; 2) a platform operator acquires a platform participant; 3) it involves the acquisition of a company that facilitates participation on multiple platforms, or 4) it involves the acquisition by a platform operator of a company that provides important inputs for platform services (such as data enabling matching, sorting, or prediction).

E. Focus on potential harm to rivals.

Historically, the Agencies followed the Brown Shoe rule that antitrust law protections “competition, not competitors”, but the Proposed Guidelines highlight mergers’ potential to harm competitors. Where discussion of harm to competitors previously occurred primarily in a vertical context, the Agencies have expanded potential harms via potential foreclosure of products or services in “related” markets that could impact competition in an overlap product market.  Most notably, the Proposed Guidelines indicate potential concerns may arise for related products rivals do not currently use but may in the future, and for circumstances where related products are or could be complementary to rivals’ competitive products and thus increase their value to customers.[12]  Through the Proposed Guidelines, the Agencies have expanded theories of harm to include current and potential 3rd party competitors.

F. Investigations of serial or “roll-up” acquisitions.

The Proposed Guidelines also announce a new approach to analyzing multiple acquisitions by the same company.  Traditionally, the Agencies have assessed a merger’s potential competitive effects independent of prior acquisitions, with an eye towards how future conduct will change because of the current merger.  The Agencies now intend to investigate “pattern[s] or strateg[ies] of multiple small acquisitions, even if no single acquisition on its own would risk substantially lessening competition or tending to create a monopoly.”[13]  This follows previously stated goals by the Agencies to bring enforcement actions against “roll-up” acquisitions, particularly in technology, pharmaceuticals, healthcare, and private equity investment.[14]

G. Enhanced focus on labor market effects.

The Proposed Guidelines expand the Agencies’ recent focus of mergers’ competitive effects in labor markets.  In her recent Statement on the Proposed Guidelines, FTC Chair Lina Khan noted that “although antitrust law from its founding has been concerned about the effects of monopoly power on workers, merger analysis in recent decades has neglected to focus on labor markets.”[15]  The Proposed Guidelines emphasize “labor markets are important buyer markets” that are separately subject to review, and downplay potential efficiencies created by firms combining operations.[16] The Agencies are already inquiring into potential labor market overlaps in Second Request investigations, as well as reviewing documents produced in merger investigations for evidence of wage fixing or no-poach agreements.

H. Expanded use of FTC Section 5 authority.

The Proposed Guidelines note several potential scenarios (and suggest more exist) where the FTC might exercise enforcement powers beyond the scope of the Sherman and Clayton Acts, reflecting Chair Khan’s often articulated intent to expand the FTC’s authority under Section 5 of the FTC Act.[17]  The Proposed Guidelines leave the scope of this expanded enforcement authority open but note examples, such as otherwise lawful transactions whose acquisition structures, regulatory jurisdictions, or procurement processes might lessen competition.[18]  As a result, the FTC may probe more widely into the acquisition dynamics and acquiring parties’ business structure during investigations and probe deeper into documents and interviews to root out potentially unique industry competitive conditions.

III. Practically, the Proposed Guidelines would bring greater antitrust scrutiny earlier in the regulatory review process and less certainty to merging parties.

Companies considering transactions should take note of the Proposed Guidelines and consider what changes to existing processes may be required.  Companies should review due diligence templates with an eye toward early identification of items that may be the subject of regulatory scrutiny, including new and expanded areas of focus including labor markets, inputs to rivals, and past acquisitions.  Companies may also want to proactively develop strong and persuasive advocacy that demonstrates the procompetitive aspects of a transaction and meets potential theories of competitive harm head-on.  Finally, document creation and retention guidance continues to be of paramount importance as the number and types of documents that could be a focus item in merger investigations continues to grow, with potential changes to the HSR filing guidelines that may require submission of many additional documents related to the transaction.[19]

IV. Conclusion & Takeaways

The Proposed Guidelines are the latest in a larger trend of expanded and more aggressive antitrust enforcement by the Agencies in the current Administration, as we have noted in our prior Client Alerts regarding changes to the HSR merger notification form, FTC’s enforcement authority under Section 5 of the FTC Act, and interlocking directorates.[20] As with other efforts to expand the reach of the antitrust laws, the enforcement policies articulated in these Proposed Guidelines will be subject to review by federal courts. And, although prior Merger Guidelines have garnered widespread acceptance in the case law, to challenge proposed transactions based on novel theories articulated in these Proposed Guidelines, the Agencies will ultimately need to persuade federal courts that these theories are supported by legal precedent.

In light of this increasingly aggressive and unpredictable merger enforcement environment, firms considering transactions should continue to proactively consult with antitrust counsel to develop appropriate antitrust risk mitigation strategies.  While the draft merger guidelines are simply guidance and may yet evolve in response to public comments, they are indicative of the theories that enforcers may study during a merger investigation.

Gibson Dunn attorneys are closely monitoring these developments and are available to discuss these issues as applied to your particular business.

___________________________

[1] Merger Guidelines (Draft for Public Comment), U.S. Dep’t of Justice & Fed. Trade Comm’n (July 19, 2023) (non-final draft for public comment purposes) (“Proposed Guidelines”).

[2] See, e.g., Exec. Order No. 14,036, 86 Fed. Reg. 36,987 (July 9, 2021).  See also Fact Sheet: Executive Order on Promoting Competition in the American Economy, The White House (July 9, 2021).

[3] See Gibson Dunn Client Alerts:  DOJ Signals Increased Scrutiny on Information Sharing (Feb. 10, 2023); FTC Proposes Rule to Ban Non-Compete Clauses (Jan. 5, 2023); FTC Announces Broader Vision of Its Section 5 Authority to Address Unfair Methods of Competition (Nov. 14, 2023); DOJ Antitrust Secures Conviction for Criminal Monopolization (Nov. 9, 2022); DOJ Antitrust Division Head Promises Litigation to Break Up Director Interlocks (May 2, 2022).

[4] Horizontal Merger Guidelines, U.S. Dep’t of Justice & Fed. Trade Comm’n (August 19, 2010).

[5] Vertical Merger Guidelines, U.S. Dep’t of Justice & Fed. Trade Comm’n (June 30, 2020).

[6] Press Release, Federal Trade Commission Withdraws Vertical Merger Guidelines and Commentary, Fed. Trade Comm’n, (Sept. 15, 2021).

[7] See Proposed Guidelines at 7 n.29 (“The first merger guidelines to reference an HHI threshold were the merger guidelines issued in 1982, which used the 1,800 HHI threshold for a highly concentrated market, and 100 HHI for a significant increase. Each subsequent iteration until 2010 maintained those thresholds. . . . . In practice, the Agencies tended to challenge mergers that greatly exceeded these thresholds to focus their limited resources on the most problematic transactions. The more permissive thresholds included in the 2010 Horizontal Merger Guidelines reflected that agency practice, rather than a judgment of the appropriate thresholds for competitive concem or the requirements of the law. The Agencies consider a threshold of a post-merger 1,800 HHI and an increase in HHI of 100 to better reflect both the law and the risks of competitive harm and have therefore returned to those thresholds here.”)

[8] See id. at 11–13.

[9] Id. at 13.

[10] Id. at 11.

[11] Id. at 11–12.

[12] See Proposed Guidelines at 14 (Section II. Guideline 5. Subsection A. “The Ability and Incentive to Weaken or Exclude Rivals”).

[13] Proposed Guidelines at 22 (Section II. Guideline 9. “When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.”).

[14] See, e.g., Statement of Commissioner Rohit Chopra Regarding Private Equity Roll-ups and the Hart-Scott Rodino Annual Report to Congress, Fed. Trade Comm’n (July 8, 2020); Deputy Assistant Attorney General Andrew Forman, The Importance of Vigorous Antitrust Enforcement in Healthcare (June 3, 2022).

[15] Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya Regarding FTC-DOJ Proposed Merger Guidelines, Fed. Trade Comm’n (July 19, 2023).

[16] See Proposed Guidelines at 26 (Section II. Guideline 11. “When A Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers.”).

[17] Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya On the Adoption of the Statement of Enforcement Policy Regarding Unfair Methods of Competition Under Section 5 of the FTC Act, Fed. Trade Comm’n (Nov. 10. 2022); Statement of Chair Lina M. Khan Joined by Commissioner Rohit Chopra and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, Fed. Trade Comm’n (July 1, 2021).

[18] Proposed Guidelines at 28 (Section II. Guideline 13. “Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly.”).

[19] See Gibson Dunn Client Alert: FTC Proposes Dramatic Expansion and Revision of HSR Merger Notification Form (June 29, 2023).

[20] See Gibson Dunn Client Alerts:  DOJ Signals Increased Scrutiny on Information Sharing (Feb. 10, 2023); FTC Proposes Rule to Ban Non-Compete Clauses (Jan. 5, 2023); FTC Announces Broader Vision of Its Section 5 Authority to Address Unfair Methods of Competition (Nov. 14, 2023); DOJ Antitrust Secures Conviction for Criminal Monopolization (Nov. 9, 2022); DOJ Antitrust Division Head Promises Litigation to Break Up Director Interlocks (May 2, 2022).

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The following Gibson Dunn lawyers prepared this client alert: Sophie Hansell, Kristen Limarzi, Josh Lipton, Michael Perry, Chris Wilson, Jamie France, Logan Billman, Zoë Hutchinson, Connor Leydecker, and Steve Pet.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition, Mergers and Acquisitions, or Private Equity practice groups, or the following practice leaders:

Antitrust and Competition Group:
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, [email protected])
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, [email protected])
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, [email protected])
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, [email protected])

Mergers and Acquisitions Group:
Robert B. Little – Co-Chair, Dallas (+1 214-698-3260, [email protected])
Saee Muzumdar – Co-Chair, New York (+1 212-351-3966, [email protected])

Private Equity Group:
Richard J. Birns – Co-Chair, New York (+1 212-351-4032, [email protected])
Ari Lanin – Co-Chair, Los Angeles (+1 310-552-8581, [email protected])
Michael Piazza – Co-Chair, Houston (+1 346-718-6670, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome

Decided July 17, 2023

California Medical Association v. Aetna Health of California, Inc., S269212

This week, the California Supreme Court held that organizations have standing to sue for violations of California’s Unfair Competition Law if they spent resources fighting the business practice they challenge as unfair.

Background: The California Medical Association (“CMA”), a nonprofit organization that advocates on behalf of member physicians, sued Aetna Health of California over Aetna’s implementation of a “Network Intervention Policy,” which limited in-network providers’ ability to refer patients to out-of-network providers.  The CMA alleged that the policy violated California’s Unfair Competition Law (“UCL”).

Under the UCL, private plaintiffs have standing to sue only if they have “suffered injury in fact” and “lost money or property as a result of” the business practice they challenge as unlawful or unfair.  (Bus. & Prof. Code, § 17204.)  CMA argued that it met this standard because it had diverted more than 200 hours of staff time to responding to Aetna’s Network Intervention Policy.  CMA alleged that, among other things, it prepared a letter to California regulators and advised affected physicians about the policy.

Aetna argued that CMA lacked statutory standing because it had not lost money or property as a result of the policy.  The trial court agreed that the diversion of organizational resources is not the same as the loss of money or property and entered summary judgment for Aetna.  The Court of Appeal affirmed.

Issue: California’s Unfair Competition Law requires private plaintiffs to have “suffered injury in fact” and “lost money or property as a result of the unfair competition” the plaintiffs challenge.  Can plaintiffs satisfy this requirement by pointing to the costs they incurred in responding to the challenged business practice?

Court’s Holding: 

Yes.  When an organization incurs costs responding to perceived unfair competition that threatens its bona fide, preexisting mission, and those costs were not incurred through litigating or preparing to litigate the organization’s UCL claims, the organization has satisfied the UCL’s standing requirements.

“[T]he UCL’s standing requirements are satisfied when an organization … incurs costs to respond to perceived unfair competition that threatens [its] mission…”

Justice Evans, writing for the Court

What It Means:

• The opinion gives organizational plaintiffs, such as nonprofits and unions, a new way to establish standing to bring claims under the UCL.  Because these types of membership organizations are unlikely to suffer a direct economic injury aside from the diversion of resources, the decision potentially opens the door to lawsuits that would previously have been barred.
• Even so, the Court imposed significant limitations on the circumstances that may give rise to standing.  Organizations may not manufacture standing by relying on expenditures made “in the course of UCL litigation, or to prepare for UCL litigation.”  And the organization’s diversion of resources must occur through its sincere pursuit of “missions separate from the planned UCL litigation,” and not through a “brief stint of advocacy.”
• The Court clarified that its decision was “limited to organizational standing; we say nothing about individual standing.”  Thus, an individual plaintiff cannot establish standing under the UCL by pointing to her own expenditure of “personal, uncompensated time responding to the alleged unfair competition.”
• In a footnote, the Court indicated that organizational plaintiffs with standing may seek injunctive relief that would primarily benefit the public—and that such actions would not be considered “representative” actions.

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The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Blaine H. Evanson +1 949.451.3805 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]	Michael J. Holecek +1 213.229.7018 [email protected]

Related Practice: Class Actions

Christopher Chorba +1 213.229.7396 [email protected]

Kahn A. Scolnick +1 213.229.7656 [email protected]

Related Practice: Litigation

Theodore J. Boutrous, Jr. +1 213.229.7804 [email protected]

Theane Evangelis +1 213.229.7726 [email protected]

Corporations can now purchase clean energy tax credits. Gibson Dunn Partners Mike Cannon and Matt Donnelly walk through:

• the credits available for purchase,
• the process for purchasing credits,
• the issues that buyers and sellers will be advised to address in negotiating credit sales, and
• emerging market developments related to the new rules for selling credits.

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As many companies prepare their quarterly reports on Form 10-Q for the quarter ended June 30, 2023, we offer the following observations and reminders regarding new disclosure requirements taking effect for this reporting period, as well as risk factor considerations that may be relevant to upcoming Form 10-Q reporting. For convenience, this publication also includes a summary of certain upcoming compliance dates for public companies.

Rule 10b5-1 Trading Arrangement Disclosures

Beginning with the filing that covers the first full fiscal period that begins on or after April 1, 2023 (i.e., Q2 2023 Form 10-Q for calendar year companies), the “Other Information” section of each periodic report (i.e., Part II, Item 5 of Form 10-Q and Part II, Item 9B of Form 10-K) must disclose whether any director or Section 16 officer adopted or terminated a trading arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or a “non-Rule 10b5–1 trading arrangement.” By its terms, the disclosure requirement (Item 408(a) of Regulation S-K) is triggered when a trading arrangement is “adopted or terminated”; however, the SEC deems certain modifications to a trading arrangement to be the termination of one arrangement and entry into another.

The disclosure must identify whether the arrangement is a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, and provide a brief description of the material terms (other than price), including (i) the name and title of the director or officer, (ii) the date of adoption or termination of the trading arrangement, (iii) the duration of the trading arrangement, and (iv) the aggregate number of securities to be sold or purchased under the trading arrangement (including pursuant to the exercise of any options).

Read More

Originally published on Gibson Dunn’s Securities Regulation and Corporate Governance Monitor. The following Gibson Dunn attorneys assisted in preparing this update: Mike Titera, Ronald Mueller, Thomas Kim, Lori Zyskowski, Elizabeth Ising, James Moloney, Julia Lapitskaya, Aaron K. Briggs, Chris Ayers, and Lauren Assaf-Holmes.

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

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Decided July 17, 2023

Adolph v. Uber Techs., S274671

The California Supreme Court held yesterday that an order requiring an employee to arbitrate PAGA claims brought on his or her own behalf does not, on its own, deprive the employee of standing to litigate non-individual PAGA claims on behalf of other employees.

Background: Erik Adolph, a driver who used Uber’s “Eats” platform, alleged that Uber misclassified drivers as independent contractors rather than employees.  He filed a claim under the Private Attorneys General Act of 2004, California Labor Code section 2698 et seq. (“PAGA”), seeking civil penalties on behalf of himself and other drivers.

Uber moved to compel arbitration of Adolph’s PAGA claim on the ground that the parties signed an agreement requiring Adolph to individually arbitrate his claims against Uber.  The trial court and Court of Appeal rejected that argument based on the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC (2014) 58 Cal.4th 380, which held that PAGA claims are not subject to arbitration.  But while Uber’s petition for review was pending before the California Supreme Court, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana (2022) 142 S.Ct. 1906, which held that the Federal Arbitration Act preempted Iskanian in relevant part and that individual PAGA claims could be compelled to arbitration.

Viking River also concluded, based on its analysis of California law, that a plaintiff lacks statutory standing to litigate his non-individual PAGA claims once his individual PAGA claim is compelled to arbitration.  The California Supreme Court granted review to resolve this issue of state law and heard argument in May 2023.

Issue: Does an aggrieved employee who is compelled to arbitrate an individual PAGA claim lose statutory standing to litigate non-individual PAGA claims on behalf of other employees?

Court’s Holding: 

No.  “Where a plaintiff has brought a PAGA action comprising individual and non-individual claims,” an order “compelling arbitration of the individual claims does not strip the plaintiff of standing as an aggrieved employee to litigate [non-individual PAGA] claims on behalf of other employees.”

“[W]here a plaintiff has filed a PAGA action comprised of individual and non-individual claims, an order compelling arbitration of individual claims does not strip the plaintiff of standing to litigate non-individual claims in court.”

Justice Liu, writing for the Court

Gibson Dunn Represented Defendant and Appellant: Uber Technologies, Inc.

What It Means:

• The Court acknowledged that the U.S. Supreme Court adopted a different interpretation of state law in Viking River but held that it was “not bound by the high court’s interpretation of California law.”  The Court declined to grant the U.S. Supreme Court’s interpretation of state law deference because the case did not involve “a parallel federal constitutional provision or statutory scheme.”
• A plaintiff has statutory standing to litigate non-individual PAGA claims if he (1) “was employed by the alleged violator” and (2) is someone “against whom one or more of the alleged violations was committed.”  A plaintiff who satisfies both requirements does not lose standing based on the “enforcement of an agreement to adjudicate [his] individual claim in another forum.”  The Court reached this conclusion in part because of its determination that the plaintiff’s case remains a single action even if the individual and non-individual PAGA claims are split and pursued in different forums under Viking River.
• The Court suggested that trial courts should stay non-individual PAGA claims pending arbitration of the individual PAGA claim, and that named plaintiffs would lose standing if they are unsuccessful in arbitration.  Specifically, the Court acknowledged that if the arbitrator determines that the plaintiff is “not an aggrieved employee” for purposes of the individual PAGA claim and the court “confirms that determination and reduces it to a final judgment,” the court should “give effect to that finding” and dismiss the plaintiff’s non-individual PAGA claims for lack of standing.
• The Court “express[ed] no view on the parties’ arguments regarding the proper interpretation of the arbitration agreement” at issue in the case and remanded to the Court of Appeal for further proceedings.

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The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Blaine H. Evanson +1 949.451.3805 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]	Michael J. Holecek +1 213.229.7018 [email protected]

Related Practice: Labor and Employment

Jason C. Schwartz +1 202.955.8242 [email protected]

Katherine V.A. Smith +1 213.229.7107 [email protected]

Related Practice: Litigation

Theodore J. Boutrous, Jr. +1 213.229.7804 [email protected]

Theane Evangelis +1 213.229.7726 [email protected]

In a July 13, 2023 letter, Attorneys General of 13 states (Alabama, Arkansas, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, South Carolina, Tennessee, and West Virginia) issued a warning to the CEOs of Fortune 100 companies, threatening “serious legal consequences” over race-based employment preferences and diversity policies.  The letter refers to the recent Supreme Court decision in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. UNC, in which the Supreme Court held that two colleges’ use of race in their admissions policies was unlawful, and warns that race-based employment decisions likewise violate federal and state laws prohibiting employment discrimination.  While the Supreme Court’s holding addressed only college and university admissions and not private-sector employers, this letter confirms that the Court’s decision may have broader implications that could accelerate an existing trend of challenges to private employers’ workplace diversity, equity and inclusion efforts.  The group emphasized the Court’s statement that “[e]liminating racial discrimination means eliminating all of it,” suggesting that this language in the Court’s opinion could be used as ammunition to challenge various private-sector diversity policies, including in actions by certain Attorneys General who have enforcement authority under the anti-discrimination laws of their respective states.

In their letter, the group of Attorneys General stated their view that “racial discrimination in employment and contracting is all too common among Fortune 100 companies and other large businesses.”  They warned that if a company “previously resorted to racial preferences or naked quotas to offset its bigotry, that discriminatory path is now definitively closed” as a result of the Supreme Court’s decision in SFFA v. Harvard, and that those companies must “overcome [their] underlying bias and treat all employees, all applicants, and all contractors equally, without regard for race.”  The letter provides specific examples of the ways in which employers allegedly engage in unlawful discrimination, such as “explicit racial hiring quota[s]” and preferences to contractors with diverse staff or minority leadership.  The letter does not address federal and state government contracting requirements, including for the certification of minority and women-owned business enterprises (MWBEs).  The Attorneys General further criticized pledges by several major companies to foster diversity and support minority-owned businesses during racial justice protests in 2020.

The letter indicates that challenges to employers’ diversity programs could stem from a comparison of the legal framework under Title VI (which governs race discrimination in government-funded programs) and Title VII (which governs race discrimination in employment).  Specifically, the letter refers to Justice Gorsuch’s concurrence in the Harvard/UNC decision, where Justice Gorsuch reasoned that principles of Title VI “apply equally to Title VII and other laws restricting race-based discrimination in employment and contracting.”  The letter also notes that courts “routinely interpret Title VI and Title VII in conjunction with each other, adopting the same principles and interpretation for both statutes.”

Democrat and Republican appointees to the EEOC have stated that the Supreme Court’s decision should not affect employers’ diversity programs, although they have widely divergent views on the implications of the decision in practice.  The Chair of the EEOC, Charlotte A. Burrows, released an official statement, taking the view that the Court’s decision does “not address employer efforts to foster diverse and inclusive workforces,” and that “[i]t remains lawful for employers to implement diversity, equity, inclusion, and accessibility programs that seek to ensure workers of all backgrounds are afforded equal opportunity in the workplace.”  Chair Burrows will preside over a Democrat majority at the EEOC with the confirmation last week of Commissioner Kalpana Kotagal.  Although EEOC Commissioner Andrea Lucas similarly stated that the decision does not alter federal employment law, she noted that race-based decision-making by employers is already presumptively illegal under Title VII, and expressed her view that many employers’ programs already run afoul of existing law.

The AG’s letter serves as an important reminder that employers should carefully evaluate whether any of their diversity and inclusion policies could face additional scrutiny or threats of litigation.  Please refer to our previous client alert for an analysis of the Court’s opinion, as well as a discussion of some potential implications for private employers.

Please note that the purpose of this alert is to summarize the letter by the Attorneys General, and not to opine on the accuracy of its contents.  Gibson Dunn has formed a Workplace DEI Task Force, bringing to bear the Firm’s expertise in employment, appellate and Constitutional law, DEI programs, securities and corporate governance, and government contracts to help our clients conduct legally privileged audits of their DEI programs (including for employees, applicants, suppliers, directors and other constituents), assess litigation risk, develop creative and practical approaches to accomplish their DEI objectives in a lawful manner, and defend those programs in private litigation and government enforcement actions as needed.

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The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Angela Reid, and Emily Lamm.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, the authors, or the following practice leaders and partners:

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group, New York
(+1 212-351-3850, [email protected])

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer, Washington, D.C.
(+1 202-955-8503, [email protected])

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

Join us for a 60-minute briefing covering key SEC rule changes that will significantly impact the timing, manner and nature of the disclosures required for company share repurchases, including nuanced interpretive issues and tax implications. Gibson Dunn attorneys Tom Kim, Jim Moloney, Matt Donnelly and Melanie Neary outline the key aspects of the SEC’s stock buyback amendments. The discussion also covers traps for the unwary and provide practical tips to help you prepare for these new disclosure requirements applicable to shares repurchases starting in Q4 2023 for companies that file on domestic forms.

Topics discussed:

1. An overview of the SEC’s new share repurchase rules covering: daily repurchase activities, exhibit filings and EDGAR tagging, coordination with insiders and their trading activities, enhanced narrative discussions regarding the company’s objectives and rationales for repurchases, and comparison with the SEC’s recent Rule 10b5-1 amendments
2. Tax implications for share repurchases
3. Interpretive issues and guidance on nuances lurking in the amendments
4. Tips on how to implement new controls and procedures to capture the critical information required under the new rules

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PANELISTS:

Thomas J. Kim is a partner in the Washington D.C. office of Gibson, Dunn & Crutcher, LLP, where he is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim focuses his practice on a broad range of SEC disclosure and regulatory matters, including capital raising and tender offer transactions and shareholder activist situations, as well as corporate governance, environmental social governance and compliance issues. He also advises clients on SEC enforcement investigations – as well as boards of directors and independent board committees on internal investigations – involving disclosure, registration, corporate governance and auditor independence issues. Mr. Kim has extensive experience handling regulatory matters for companies with the SEC, including obtaining no-action and exemptive relief, interpretive guidance and waivers, and responding to disclosures and financial statement reviews by the Division of Corporation Finance. Mr. Kim served at the SEC for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance, and for one year as Counsel to the Chairman.

Jim Moloney is a corporate partner resident in the Orange County office of Gibson Dunn and serves as Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group. He is also a member of the firm’s Corporate Transactions Practice Group, focusing primarily on securities offerings, mergers & acquisitions, friendly and hostile tender offers, proxy contests, going-private transactions and other corporate matters. Mr. Moloney was with the Securities & Exchange Commission in Washington, D.C. for six years before joining Gibson Dunn in June 2000. He served his last three years at the Commission as Special Counsel in the Office of Mergers & Acquisitions in the Division of Corporation Finance. In addition to reviewing merger transactions, Mr. Moloney was the principal draftsman of Regulation M‑A, a comprehensive set of rules relating to takeovers and shareholder communications, that was adopted by the Commission in October 1999. Mr. Moloney advises a wide range of listed public companies on reporting and other obligations under the securities laws, the establishment of corporate compliance programs, and continued compliance with corporate governance standards under the securities laws and stock exchange rules. He advises public company boards and committees of independent directors in connection with mergers, stock exchange proceedings, as well as SEC and other regulatory investigations.

Matt Donnelly is a partner in the Washington, D.C. office of Gibson Dunn & Crutcher and a member of the firm’s Tax Practice Group. Mr. Donnelly represents public and private companies on a broad range of U.S. federal and state income tax matters, with a concentration on domestic and international mergers and acquisitions, dispositions, spin-offs, Reverse Morris Trust transactions, joint ventures, financing transactions, capital markets transactions, restructurings and internal reorganizations. In addition, Mr. Donnelly regularly advises clients on tax issues relating to the development, financing, acquisition and disposition of energy and real estate projects. Mr. Donnelly is an adjunct professor at Howard University School of Law, where he has taught corporate tax law since 2017, and at Georgetown University Law Center, where he has taught since 2020 and in 2024 will teach a first-of-its-kind course on tax incentives under the Inflation Reduction Act of 2022. In addition, Mr. Donnelly regularly speaks and writes on tax-related topics, including at USC’s Gould School of Law’s Tax Institute, the American Petroleum Institute Federal Tax Forum, Practising Law Institute’s Tax Planning for Domestic & Foreign Partnerships, LLCs, Joint Ventures & Other Strategic Alliances conference, and the University of Chicago Federal Tax Conference (Fall 2023).

Melanie Neary is an associate in the San Francisco office of Gibson, Dunn & Crutcher. She currently practices in the firm’s Corporate Department. Her practice is focused on capital markets transactions and mergers & acquisitions, and includes representation of clients in connection with corporate governance and Exchange Act reporting matters. Melanie received her J.D. from the University of Michigan Law School in 2016, where she was the Managing Editor of the Michigan Business & Entrepreneurial Law Review. While in law school, she worked in the Transactional Lab and Clinic, advising large organizations around the country and small organizations in the Ann Arbor community on transactional matters.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.

Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.0 hour. Regulated by the Solicitors Regulation Authority (Number 324652).

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Virginia, Texas and Washington State Bars.

Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide to: Anti-Money Laundering 2023. Gibson Dunn partners Stephanie L. Brooker and M. Kendall Day were contributing editors to the publication which covers issues including criminal enforcement, regulatory and administrative enforcement and requirements for financial institutions and other designated businesses. The Guide, comprised of 10 expert analysis chapters and 23 jurisdictions, is live and FREE to access HERE.

Ms. Brooker, senior associate Chris Jones, and Managing Director and Associate General Counsel at the Securities Industry and Financial Markets Association Bernard Canepa co-authored “Key BSA/AML Compliance Trends in the Securities Industry.” Sandy Moss and Ben Belair provided invaluable assistance with the article.

In addition, Mr. Day and Gibson Dunn of counsels Ella Capone and Linda Noonan co-authored the jurisdiction chapter on “USA: Anti-Money Laundering 2023.”

You can view these informative and comprehensive chapters via the links below:

CLICK HERE to view Key BSA/AML Compliance Trends in the Securities Industry

CLICK HERE to view USA: Anti-Money Laundering 2023

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About Gibson Dunn’s Anti-Money Laundering and White Collar Practices:

Gibson Dunn’s Anti-Money Laundering practice provides legal and regulatory advice to all types of financial institutions and nonfinancial businesses with respect to compliance with federal and state anti-money laundering laws and regulations, including the U.S. Bank Secrecy Act. We represent clients in criminal and regulatory government investigations and enforcement actions. We also conduct internal investigations involving money laundering and Bank Secrecy Act violations for a wide range of clients in the financial services industry and companies with multinational operations. For further information, please visit our practice page and feel free to contact Stephanie L. Brooker (+1 202.887.3502, [email protected]) or M. Kendall Day (+1 202.955.8220, [email protected]) in Washington, D.C.

The White Collar Defense and Investigations Practice Group defends businesses, senior executives, public officials and other individuals in a wide range of investigations and prosecutions. The group is composed of more than 250 lawyers practicing across our U.S. and international offices and draws on the expertise of more than 75 of its members with extensive government experience. We provide white collar client services around the world, with certain of our non-U.S. locations offering particular capabilities. For example, our Hong Kong office leads Gibson Dunn’s anti-corruption and compliance practice for Asia and our London disputes lawyers work regularly with complex internal and regulatory investigations, with particular familiarity in cross-border investigations in the financial services sector.

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About the Authors:

Stephanie Brooker is Co-Chair of Gibson Dunn’s White Collar Defense and Investigations and Financial Institutions Practice Groups. She also co-leads the firm’s Anti-Money Laundering practice. She is the former Director of the Enforcement Division at FinCEN, and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a DOJ trial attorney for several years. Ms. Brooker’s practice focuses on internal investigations, regulatory enforcement defense, white-collar criminal defense, and compliance counseling. She handles a wide range of white collar matters, including representing financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving sanctions; anti-corruption; anti-money laundering (AML)/Bank Secrecy Act (BSA); securities, tax, and wire fraud; foreign influence; “me-too;” cryptocurrency; and other legal issues. Ms. Brooker’s practice also includes BSA/AML and FCPA compliance counseling and deal due diligence and asset forfeiture matters. Ms. Brooker has been consistently recognized as a leading practitioner in the areas of white collar criminal defense and anti-money laundering compliance and enforcement defense. Chambers USA has ranked her and described her as an “excellent attorney,” who clients rely on for “important and complex” matters, and noted that she provides “excellent service and terrific lawyering.” Ms. Brooker has also been named a National Law Journal White Collar Trailblazer, a Global Investigations Review Top 100 Women in Investigations, and an NLJ Awards Finalist for Professional Excellence—Crisis Management & Government Oversight.

Kendall Day is Co-Chair of Gibson Dunn’s Financial Institutions Practice Group, co-leads the firm’s Anti-Money Laundering practice, and is a member of the White Collar Defense and Investigations Practice Group. Prior to joining Gibson Dunn, Mr. Day was a white collar prosecutor for 15 years, eventually rising to become an Acting Deputy Assistant Attorney General, the highest level of career official in the Criminal Division at DOJ. He represents financial institutions; fintech, crypto-currency, and multi-national companies; and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, false claims act, and sensitive employee matters. Mr. Day’s practice also includes BSA/AML compliance counseling and due diligence, and the defense of forfeiture matters. Mr. Day is consistently recognized as a leading White Collar attorney in the District of Columbia by Chambers USA – America’s Leading Business Lawyers. Most recently, Mr. Day was recognized in Best Lawyers 2023 for white-collar criminal defense.

Ella Alves Capone is Of Counsel in the Washington, D.C. office, where she is a member of the White Collar Defense and Investigations and Anti-Money Laundering practice groups. Her practice focuses in the areas of white collar investigations and advising clients on regulatory compliance and the effectiveness of their internal controls and compliance programs. Ms. Capone routinely advises multinational companies and financial institutions, including cryptocurrency and other digital asset businesses, gaming businesses, fintechs, and payment processors, on BSA/AML and sanctions compliance matters. She also has extensive experience representing clients before DOJ, SEC, OFAC, FinCEN, and federal banking regulators on a variety of white collar matters, including those involving BSA/AML, sanctions, anti-corruption, securities, and fraud matters.

Linda Noonan is Of Counsel in the Washington, D.C. office and a member of the firm’s Financial Institutions and White Collar Defense and Investigations Practice Groups. She joined the firm from the U.S. Department of the Treasury, Office of General Counsel, where she had been Senior Counsel for Financial Enforcement. In that capacity, she was the principal legal advisor to Treasury officials on domestic and international money laundering and related financial enforcement issues. She specializes in BSA/AML enforcement and compliance issues for financial institutions and non-financial businesses.

Chris Jones is a senior associate in the Los Angeles office of Gibson, Dunn & Crutcher. He is a member of the White Collar Defense and Investigations, Litigation, Anti-Money Laundering, and National Security Practice Groups, among others. His practice focuses primarily on internal investigations and enforcement defense, regulatory and compliance counselling, and complex civil litigation. Mr. Jones has experience representing clients in a wide range of anti-corruption, anti-money laundering, litigation, sanctions, securities, and tax matters. He has represented various client in investigations by the DOJ, SEC, FinCEN, and OFAC, including a number of AML-related investigations.

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

We are pleased to provide you with Gibson Dunn’s ESG monthly updates for June 2023. This month, our update covers the following key developments. Please click on the links below for further details.

I. International

1. ISSB publishes first two IFRS Sustainability Disclosure Standards

In June 2023, the International Sustainability Standards Board (“ISSB”) issued its IFRS Sustainability Disclosure Standards based on the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). IFRS S1 relates to the General Requirements for Disclosure of Sustainability-related Financial Information. It is effective for annual reporting period beginning on or after January 1, 2024 – earlier application is permitted if IFRS S2 is also applied. IFRS S2 relates to Climate-related Disclosures. It is effective for annual reporting period beginning on or after January 1, 2024 – earlier application is permitted if IFRS S2 is also applied. The ISSB is continuing to seek feedback on its future priorities for its next two-year work plan, which consultation closes on September 1, 2023.

2. ICMA announces updates to the Climate Transition Finance Handbook and Sustainability Principles

On June 22, 2023, the International Capital Markets Association (“ICMA”) announced that the Green, Social, Sustainability and Sustainability-Linked Bond Principles (the “Principles”) published revised 2023 editions of: (i) the Climate Transition Finance Handbook, which was originally launched in 2020 – the revisions include the progress made on climate transition guidance and disclosures; (ii) the Sustainability-Linked Bond Principles – the revisions include language for sovereign issuers together with revisions to the accompanying Key Performance Indicator registry; (iii) the Social Bond Principles – the revisions reflect the need to identify target populations and separately provide specific guidance for impact reporting for Social Bonds; and (iv) additional Q&As for green, social and sustainable bond securitisation, among other updates.

3. New reporting window open for signatories of the UN PRI and guidance published

Our May 2023 Update included an update on the release by the United Nations Principles for Responsible Investment (“PRI”) of a report on “Minimum Requirements for PRI Investor Signatories.” On June 14, 2023, the new reporting window for signatories of the PRI opened – this closes on September 6, 2023. PRI also published guidance on net zero and climate reporting in PRI’s Investor Reporting Framework, including (a) guidance to assist signatories of the Net Zero Asset Owner Alliance (“NZAOA”) who choose to report on their NZAOA requirements through PRI’s Investor Reporting Framework; (b) guidance to assist signatories of the Net Zero Asset Managers (“NZAM”) initiative to report on their NZAM commitments; and (c) guidance for all PRI signatories on climate reporting, based on TCFD-aligned indicators.

4. OECD updates its Guidelines for Multinational Enterprises on Responsible Business Conduct

On June 8, 2023, the Organisation for Economic Co-operation and Development (“OECD”) published an updated version of the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. Key updates include recommendations for enterprises to align with internationally agreed goals on climate change and biodiversity, recommendations on risk-based due diligence, and specific environmental responsibilities.

5. IEA-IFC issue a special joint report calling for ramping up clean energy investments in emerging and developing countries

On June 21, 2023, the International Energy Agency (“IEA”) and the International Finance Corporation (“IFC”) published a special  joint report. The report examines how to scale up private finance for clean energy transitions, identifies key barriers and how to remove them, and sets out policy actions and financial instruments to deliver acceleration in private capital flows for energy transition.

6. Climate Action 100+ announces its second phase

On June 8, 2023, Climate Action 100+ announced the launch of its second phase. The second phase will run until 2030 and intends to drive greater corporate climate action, by shifting the focus from corporate climate-related disclosure to the implementation of climate transition plans.

7. Nature Action 100 releases investor expectations to support urgent corporate action on nature loss

Nature Action 100, which is a global investor engagement initiative to address biodiversity and nature loss, and its impact on shareholder value, has released a set of corporate actions intended to protect and restore nature and ecosystems. The Investor Expectation for Companies outlines six key focus areas for action: ambition, assessment, targets, implementation, governance and engagement. Among other expectations, target companies will be expected to publicly commit to minimising contributions to key drivers of nature loss and to conserve and restore ecosystems at the operational level and throughout value chains by 2030. The eight key sectors identified for action are: biotechnology and pharmaceuticals; chemicals, such as agricultural chemicals; household and personal goods; consumer goods retail, including e-commerce and speciality retailers and distributors; food, ranging from meat and dairy producers to processed foods; food and beverage retail; forestry and paper, including forest management and pulp and paper products; metals and mining.

II. United Kingdom

1. FCA outlines concerns about sustainability-linked loans market

The Financial Conduct Authority (“FCA”) has outlined its concerns about the sustainability-linked loans (“SLLs”) market by way of a letter to interested stakeholders and parties on June 29, 2023. Concerns have been raised around credibility (including increased transparency), market integrity, greenwashing, conflicts of interest and potentially weak incentives to issue SLLs. The FCA has noted that some of these concerns have been addressed by the recently published revision of the Loan Market Association’s Sustainability-Linked Loan Principles, which the FCA believes should be more broadly adopted to drive further growth. The FCA does not currently plan to introduce regulatory standards or a code of conduct for the SLLs market, but has stated that it may reconsider this if the market needs it.

2. Climate Change Committee criticises UK’s slow efforts to scale up climate action

The Climate Change Committee (“CCC”) is an independent statutory body established under the UK Climate Change Act 2008 to advise the UK and devolved Governments on emissions targets, to report on progress and to prepare for the impacts of climate change. On June 28, 2023, the CCC issued its statutory progress report providing an overview of the Government’s progress to date in reducing emissions. The report includes criticism of the Government’s progress as slow and notes that the CCC’s confidence in the UK’s 2030 target has markedly declined since 2022.

3. CMA’s enforcement powers to combat greenwashing under the UK Digital Markets, Competition and Consumers Bill

The UK Digital Markets, Competition and Consumers Bill was introduced to Parliament on April 25, 2023. It is presently in the Committee Stage with Committee debates having taken place through the month of June 2023. If adopted in its current form, it will give the UK Competition Markets Authority (“CMA”) the power to, without a court process, impose directions or fines for the breach of consumer law protections which could extend to greenwashing.

4. FRC publishes report on influence of proxy voting advisors and ESG rating agencies and HMT consultation on regulation of ESG ratings providers ends

On June 15, 2023, the Financial Reporting Council (“FRC”) published its report commissioned to look into the influence of proxy voting advisors and ESG rating agencies on actions and reporting by FTSE350 companies and investor voting decisions. This report was published during a period when His Majesty’s Treasury had been consulting on a proposed regulatory regime for ESG ratings providers, which consultation period ended on June 30, 2023.

5. Consultation on UK non-financial reporting requirements

On June 8, 2023, the UK Department of Business and Trade (“DBT”) and the FRC opened consultation in relation to a review of the non-financial reporting requirements UK companies need to comply with in their annual report filings and to meet requirements broader than the UK Companies Act (e.g. gender pay gap and modern slavery reporting). The review will also consider if certain matters remain fit for purpose, such as the current company size thresholds that determine certain non-financial reporting requirements, and the preparation and filing of accounts with Companies House. The consultation closes on August 16, 2023.

III. Europe

1. New Sustainable Finance Package published and crackdown on ESG rating providers

Our May 2023 Update included an update on the impending publication of the EU sustainable finance package as part of the EU’s long-term vision to make Europe climate-neutral by 2050. On June 13, 2023, the European Commission published the new sustainable finance package with a view to encouraging private funding of transition projects and technologies and facilitating sustainable investments. The European Commission has added additional activities to the EU Taxonomy and, to mitigate the risk of greenwashing, proposed new rules for ESG rating providers to improve integrity, reliability and transparency in the sustainable investments market. If the rules are approved, ESG rating providers offering ratings in the EU will be required to seek prior authorisation from the European Securities and Markets Authority and to divest from conflicting activities (e.g. offering insurance to businesses that they rate).

2. European Commission consults on the first set of European Sustainability Reporting Standards

On June 9, 2023, the European Commission proposed for consultation the first set of European Sustainability Reporting Standards (“ESRS”) under the Corporate Sustainability Reporting Directive (“CSRD”). This consultation closes on July 7, 2023. The ESRS will apply from January 1, 2024 (for financial years beginning on or after January 1, 2024). The first set of ESRS are sector-agnostic, with sector-specific standards to be adopted by June 2024.

3. European Parliament adopts position on Corporate Sustainability Due Diligence Directive

On June 1, 2023, the European Parliament adopted its position on the proposal for a directive on Corporate Sustainability Due Diligence and amending Directive (“CSDDD”). In April 2023, the European Parliament’s committee on legal affairs adopted a draft report setting out a suite of amendments to the CSDDD as proposed by the European Commission, which the European Parliament has now adopted. Inter-institutional negotiations between the European Commission, the European Parliament and EU Member States on the CSDDD will now commence. Following formal adoption of the CSDDD, EU Member States will have two years to implement it into national legislation. The subject matter relates to rules to integrate (prevent, identify and mitigate) human rights and environmental impact into companies’ governance and along their value chain, including pollution, environmental degradation and biodiversity loss.

4. EU Deforestation Regulation enters into force

Our May 2023 Update included an update on the adoption by the European Parliament of the final text of the EU Regulation aimed at tackling deforestation and forest degradation (the “EU Deforestation Regulation”). The EU Deforestation Regulation entered into force on June 29, 2023. Please refer to our earlier update in relation to the scope, purpose and applicability.

IV. United States

1. SEC delays climate change disclosure rulemaking once again

On June 13, 2023, in its updated rulemaking agenda for Spring 2023, the U.S. Securities and Exchange Commission (“SEC”) indicated a goal of October 2023 for the adoption of proposed climate change rules. Although the “Reg Flex” agenda is not binding and target dates frequently are missed or further delayed, the Spring agenda indicates that these remain a near-term priority for the SEC. If adopted, the proposed rules will require a registrant to provide information regarding: (a) climate-related risks that are reasonably likely to have a material impact on its business, results of operations or financial condition; (b) greenhouse gas emissions; and (c) certain climate-related financial metrics in its audited financial statements.

2. PCAOB proposes an expansive non-compliance standard

On June 6, 2023, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment a draft auditing standard, A Company’s Noncompliance with Laws and Regulations, PCAOB Release 2023-003, that could significantly expand the scope of audits and potentially alter the relationship between auditors and their SEC-registered clients. The standard would require auditors to identify all laws and regulations applicable to the company and from that set determine those laws and regulations “with which noncompliance could reasonably have a material effect on the financial statements”; incorporate potential noncompliance into the auditor’s risk assessment; and identify whether noncompliance may have occurred through enhanced procedures and testing. If potential noncompliance is identified, the auditor must perform procedures to understand the nature of the matter and “determine” if noncompliance in fact occurred. This standard would mean, for example, that auditors would need to assess whether any climate change or other ESG-related regulations issued at the federal, state, local, international level could have a material effect on a company’s financial statements and, if so, assess noncompliance. Our client alert on this proposal is available here.

3. North Carolina passes anti-ESG bill

In our May 2023 Update, we provided an update on various U.S. states that remained split on their approach to ESG matters. An anti-ESG bill has become law in North Carolina, after legislators voted to override the Governor’s veto. The legislation bars state entities from considering ESG criteria when making investment and employment decisions.

4. House Appropriations Committee releases FY24 Financial Services and General Government Appropriations Bill prohibiting SEC funding for climate disclosure rules

The House Appropriations Committee released the Financial Services and General Government Bill for the fiscal year 2024 and approved the bill with riders that would prohibit the SEC from spending on various proposals, including the climate disclosure rules. The next step is for the legislation to be introduced in the Senate (where it may face resistance given the Democratic-majority).

5. July rumoured to be “ESG month” and Republican ESG Working Group releases interim report

Plans are rumoured to be afoot for the House Financial Services Committee’s flagship “ESG month,” with a full committee hearing on ESG on July 12 and subcommittee hearings to follow thereafter. The Republican ESG Working Group, which was formed in February 2023, released an interim report highlighting anti-ESG concerns on June 23, 2023.

6. ISS responds to State Treasurers’ letter

On June 29, 2023, the Institutional Shareholder Services Inc. (“ISS”) issued its response to a group of U.S. state treasurers and financial officers to address issues they raised in a letter dated May 15, 2023 to proxy advisory firms, including ISS. The response emphasises that ISS tailors its proxy voting advice, including on ESG, based on a client’s needs and preferences, such that it may offer two different clients opposing recommendations about the same ballot measure. It further notes that many investors believe that incorporating material ESG factors into fundamental investment analysis can be consistent with their duty to manage the long-term financial prospects of their investment portfolios and a growing number of investors consider ESG factors as material to their proxy voting determinations as well. ISS has developed Special Voting Policies, such as a Climate Policy (based on the TCFD), Socially Responsible Investor Policy, Sustainability Policy, among others.

V. APAC

1. Updated ASEAN Taxonomy Version 2 released

On June 9, 2023, the ASEAN Taxonomy Board released the updated ASEAN Taxonomy for Sustainable Finance Version 2. The ASEAN Taxonomy has a multi-tiered approach which allows for different levels of adoption based on the individual member states’ readiness. Version 2 provides the methodology that will be applied in setting the technical screening criteria for the Plus Standard and contains the technical screening criteria for all four environmental objectives for the energy sector, as well as the carbon storage, utilisation and storage enabling sector. Alongside the “Do No Significant Harm” and “Remedial Measures to Transition” criteria, Version 2 also introduces a third essential criteria – “Social Aspects.” Three key social aspects are to be considered as part of the assessment: Respect Human Rights, Prevention of Forced and Child Labour and Impact on People Living Close to Investments.

2. Thailand issues Phase One of its green taxonomy

The Bank of Thailand and Thailand’s Securities and Exchange Commission, together with the Climate Bonds Initiative, published the Thailand Taxonomy Phase One on June 30, 2023. Phase One of the Taxonomy focuses on economic activities relating to the energy and transportation sectors, and may be used as a reference for access to financial tools and services that support transition activities to address climate change. Phase Two of the Thailand Taxonomy will focus on the manufacturing, agriculture, real estate, construction and waste management sectors. The Thailand Taxonomy will employ the traffic light system, which is also employed in the ASEAN Taxonomy.

3. Malaysia rolls out new mandatory sustainability onboarding programme for PLC directors

The Securities Commission of Malaysia and the Malaysian stock exchange, Bursa Malaysia, have rolled out a new mandatory sustainability programme for onboarding directors of public listed companies. The “Mandatory Accreditation Programme (MAP) Part II: Leading for Impact (LIP)” is the second part of Bursa Malaysia’s listing requirements and will take effect on August 1, 2023, requiring first-time directors and directors of listing and transfer applicants to complete the sustainability programme within 18 months from appointment/admission. Existing PLC directors will have up to 24 months to complete the programme.

4. Singapore consults on ESG data and ratings code of conduct, to digitise basic ESG credentials for MSMEs, and to strengthen access to climate transition data

On June 28, 2023, the Monetary Authority of Singapore (“MAS”) launched a public consultation on a voluntary industry governance framework / code of conduct for providers of ESG ratings and ESG data products, which is modelled after the International Organization of Securities Commissions’ recommendations of good practices set out in its global call for action in November 2022. The regime is proposed to be voluntary, where providers would ratify the code of conduct and explain why they are unable to comply. The consultation closes on August 22, 2023. MAS is also seeking feedback on its proposed criteria for the early phase-out of coal-fired power plants under its draft green taxonomy (which is to be named the Singapore-Asia Taxonomy). This consultation closes on July 28, 2023. On June 22, 2023, MAS, the United Nations Development Programme and the Global Legal Entity Identifier Foundation executed a statement of intent for “Project Savannah,” to develop digital ESG credentials for micro, small and medium-sized enterprises (MSMEs). On June 27, 2023, MAS, the Secretariat of the Climate Data Steering Committee and Singapore Exchange executed a memorandum of understanding to strengthen access by stakeholders to key climate transition-related data.

5. UAE Independent Climate Change Accelerators launches UAE Carbon Alliance

The UAE Independent Climate Change Accelerators (“UICCA”) has launched the UAE Carbon Alliance, a new coalition to advance the development and scaling of a carbon market ecosystem in the UAE and to facilitate the transition to a green economy in line with the UAE’s Net Zero by 2050 Strategic Initiative. Founding members of the UAE Carbon Alliance include the UICCA, AirCarbon Exchange, First Abu Dhabi Bank, Mubadala Investment Company, TAQA, and Masdar.

Please let us know if there are other topics that you would be interested in seeing covered in future editions of the monthly update.

Warmest regards,

Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michael K. Murphy
Selina S. Sagayam

Environmental, Social and Governance Practice Group Leaders, Gibson, Dunn & Crutcher LLP

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The following Gibson Dunn lawyers prepared this client update: Mitasha Chandok, Grace Chong, Elizabeth Ising, Patricia Tan Openshaw, Selina Sagayam, and David Woodcock.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Environmental, Social and Governance practice group:

Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213-229-7121, [email protected])
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Patricia Tan Openshaw – Hong Kong (+852 2214-3868, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])
David Woodcock – Dallas (+1 214-698-3211, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

Gibson Dunn’s summary of director education opportunities has been updated as of July 2023. A copy is available at this link. Boards of Directors of public and private companies find this a useful resource as they look for high quality education opportunities.

This quarter’s update includes a number of new opportunities as well as updates to the programs offered by organizations that have been included in our prior updates. Some of the new opportunities include unique events for members of private boards.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Lori Zyskowski, Ronald Mueller, and Elizabeth Ising, with assistance from Mason Gauch and To Nhu Huynh from the firm’s Houston office.

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

As we close out Pride Month 2023, we wanted to take a moment to reflect and celebrate the work that Gibson, Dunn & Crutcher LLP has done together for the LGBTQ+ community over the last few years. We also want to recognize the acute challenges facing this community at this moment in time and pledge our continued support and activism in support of their rights. Gibson Dunn has a long history of supporting the LGBTQ+ community, including through our pro bono practice. We have represented LGBTQ+ asylum-seekers; helped transgender, nonbinary and gender-nonconforming clients obtain name and gender marker changes; and partnered with nonprofits and other organizations defending LGBTQ+ rights around the world.

Included in this newsletter are a few of the Firm’s recent pro bono matters for members of the LGBTQ+ community. We are proud to work on these matters and are committed to continuing this important work in the years to come, particularly as LGBTQ+ individuals face increasing threats to their rights and safety.

View Newsletter

Decided June 30, 2023

Biden, et al. v. Nebraska, et al., No. 21-869; Department of Education, et al., v. Brown, et al., No. 22-535

Today, the Supreme Court held 6-3 that the HEROES Act does not authorize the Secretary of Education to cancel hundreds of billions of dollars in student loan balances.

Background: Under the Higher Education Relief Opportunities for Students Act of 2003 (“HEROES Act”), the Secretary of Education may “waive or modify any statutory or regulatory provision” governing student loans in times of “national emergency” to ensure no borrower is “placed in a worse position financially” because of the emergency.  During the COVID-19 pandemic, the Secretary exercised that authority to defer student loan repayments.   When lifting the deferment in August 2022, however, the Secretary purported to exercise the same authority to cancel up to $20,000 in student loan principal for approximately 43 million qualifying individuals.

Six states that service or hold federally backed student loans sued in Missouri—and two individuals who were denied loan cancellation sued in Texas—to challenge the Secretary’s loan-cancellation program.  The plaintiffs argued that the Secretary exceeded his power under the HEROES Act by cancelling debts, and that the program violated the Administrative Procedure Act both because it was arbitrary and capricious and because it was adopted without following the proper procedures.

Both the Eighth Circuit and a Texas district court barred enforcement of the Secretary’s loan-cancellation program.  In both cases the Secretary sought stays from the U.S. Supreme Court, and the Supreme Court treated the Secretary’s stay applications as petitions for a writ of certiorari before judgment and granted review of both decisions.

Issues:

(1) Does at least one plaintiff have standing to challenge the Secretary’s loan-cancellation program?

(2) Does the loan-cancellation program exceed the Secretary’s authority under the HEROES Act? 

Court’s Holding:

(1) At a minimum, the state of Missouri had standing because it suffered an injury in fact to a state-created government corporation that would lose servicing fees for the cancelled loans.

(2) On the merits, the Secretary exceeded his statutory authority under the HEROES Act.

“The Secretary asserts that the HEROES Act grants him the authority to cancel $430 billion of student loan principal. It does not.”

Chief Justice Roberts, writing for the Court in Biden v. Nebraska

What It Means:

• The Court’s decision rested primarily on statutory interpretation of the HEROES Act.  The Court interpreted the Secretary’s authority to “waive or modify” any statutory or regulatory provision applying to federal student-loan programs to allow only “modest adjustments” to existing provisions.  Slip op. 13.  That power did not include authority to “draft a new section of the [Higher] Education Act from scratch.”  Id. at 17.
• The Court also found support for its holding in the major-questions doctrine.  Under that doctrine, courts will require a clear statement from Congress before presuming that Congress entrusted questions of deep “economic and political significance” to agencies.  The Court rejected the government’s argument that the major-questions doctrine should apply only to government’s power to regulate, not to the provision of government benefits, remarking that the Court had “never drawn that line” because one of “Congress’s most important authorities is its control of the purse.”  Slip op. 24.
• Justice Barrett, who joined the Court’s opinion, penned a separate concurrence to elaborate on her view that the major-questions doctrine “is a tool for discerning—not departing from—the text’s most natural interpretation.”  Justice Barrett explained that the doctrine reflects “common sense as to the manner in which Congress is likely to delegate a policy decision of such economic and political magnitude to an administrative agency.”  Slip. op. 2, 5.
• Today’s decision represents the second time the Supreme Court has applied the “major questions doctrine” since first acknowledging the doctrine by name in West Virginia v. EPA, 142 S. Ct. 2587 (2022).  This case also continues the Court’s trend in recent years of reining in the administrative state as well as granting certiorari before judgment to resolve high-profile cases.

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The Court’s opinion in Biden v. Nebraska is available here and its opinion in Department of Education v. Brown is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Lucas C. Townsend +1 202.887.3731 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]	Brad G. Hubbard +1 214.698.3326 [email protected]
James L. Zelenay Jr. +1 213.229.7449 [email protected]

Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia +1 202-955-8210 [email protected]

Helgi C. Walker +1 202.887.3599 [email protected]

On June 13, 2023, in its updated rulemaking agenda for Spring 2023, the Securities and Exchange Commission (“SEC”) indicated a goal of October 2023 for the adoption of proposed cybersecurity rules applicable to public companies and registered investment advisers and funds. The two rule proposals were issued by the SEC at the beginning of 2022 to address cybersecurity governance and cybersecurity incident disclosure, and the SEC had previously targeted adoption by no later than  April 2023. Although the “Reg Flex” agenda is not binding and target dates frequently are missed or further delayed, the Spring agenda indicates that cybersecurity rulemakings remain a top, near-term priority for the SEC.

The Proposed Rules

Publicly Traded Companies

In March 2022, the SEC proposed new rules under the Securities Exchange Act of 1934 (the “Exchange Act”), titled Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure (the “Exchange Act Proposal”). If adopted in its proposed form, the Exchange Act Proposal would require standardized disclosures regarding specific aspects of a company’s cybersecurity risk management, strategy, and governance. The Exchange Act Proposal also would require reporting on material cybersecurity incidents within four business days of a company’s materiality determination and periodic disclosures regarding, among other things, a company’s policies and procedures to identify and manage cybersecurity risk, oversight of cybersecurity by the board of directors and management, and updates to previously disclosed cybersecurity incidents.

Registered Investment Advisers and Funds

In February 2022, the SEC proposed new rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, titled “Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies“ (the “RIA Proposal”). If adopted in its proposed form, the RIA Proposal would require both registered investment advisers and investment companies to adopt and implement written cybersecurity policies and procedures to address cybersecurity risk. The RIA Proposal would also require registered investment advisers to report significant cybersecurity incidents affecting the investment adviser or the funds it advises to the SEC, and would impose a new recordkeeping policy and internal review requirements related to cybersecurity.

In addition to the two proposals described above, the SEC has also proposed a cybersecurity rule for broker-dealers, clearing agencies, and other security market participants, but final action on this rule proposal is not expected until April 2024.

As discussed in our prior client alert on the Exchange Act Proposal, the SEC’s proposals were controversial, and many of the comments submitted on the proposals were critical of both the prompt incident reporting standard and prescriptive disclosures on board oversight and director cybersecurity expertise. Since that time, the SEC has adopted a number of rules substantially as proposed, but has significantly revised other rule initiatives in response to commenter concerns, and has also taken varied approaches with respect to new rules’ effective dates. As a result, it is difficult to predict what form the SEC’s final rules will take, and how soon companies will need to adapt their disclosures. Our prior client alert lists a number of actions companies can take in preparation for the final rules, and our recent article offers additional practical guidance given the SEC’s increased enforcement focus on cyber disclosures.

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The following Gibson Dunn attorneys assisted in preparing this update: Cody Poplin, Matthew Dolloff, Sheldon Nagesh, Nicholas Whetstone, Stephenie Gosnell Handler, Vivek Mohan, Elizabeth Ising, Ronald Mueller, and Lori Zyskowski.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Privacy, Cybersecurity and Data Innovation or Securities Regulation and Corporate Governance practice groups:

Privacy, Cybersecurity and Data Innovation Group:
S. Ashlie Beringer – Palo Alto (+1 650-849-5327, [email protected])
Jane C. Horvath – Washington, D.C. (+1 202-955-8505, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, [email protected])
Vivek Mohan – Palo Alto (+1 650-849-5345, [email protected])

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
James J. Moloney – Orange County (+1 949-451-4343, [email protected])
Ron Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])

Investment Funds Group:
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, [email protected])
Shukie Grossman – New York (+1 212-351-2369, [email protected])
Edward D. Sopher – New York (+1 212-351-3918, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

On June 20, 2023 the Securities and Exchange Commission (the “SEC” or the “Commission”) announced the settlement of an enforcement action against Insight Venture Management LLC (d/b/a Insight Partners) (“Insight”) and published an Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940  (the “Order”).[1] In the Order, the SEC found that Insight (1) charged excess management fees to its investors through “inaccurate application of its permanent impairment policy” and (2) failed to disclose a conflict of interest to investors concerning the same policy.[2] This action reflects a growing trend we continue to see in our representation of private fund managers in their routine examinations by the SEC–direct and explicit inquiry into the decision by a given fund manager to not permanently impair (i.e., “write-down”) a given fund asset when such impairment would reduce the basis on which management fees are calculated. We view this as a clear indication of the Commission’s focus on scrutinizing the calculation of management fees, in particular after the termination of the commitment period.

I. Calculation of Management Fees

Insight operated multiple funds (the “Funds”) whose respective limited partnership agreements (“LPAs”) required, like many do, that management fees be calculated during the “commitment period” (i.e., the period during which the Funds were permitted to make investments) on the basis of committed capital and during the “post-commitment period” (i.e., the period after the commitment period during which the Funds look to exit investments and realize returns)[3] based on invested capital (i.e., “the acquisition cost of portfolio investments held by the Funds”). Pursuant to the LPAs, when an asset had suffered a “permanent impairment in value” that basis was to be reduced commensurately.[4] The Commission took issue with Insight’s approach to determining whether a permanent impairment had occurred (and whether Insight resultantly calculated management fees on too large a basis).

Specifically, the Commission identified three of Insight’s practices as problematic:

• Lack of written criteria in LPA. Insight did not include any language in the Funds’ LPAs indicating how a permanent impairment determination would be made.[5]
• Subjective evaluation criteria. In practice, Insight employed a four pronged test to determine whether a permanent impairment was appropriate[6] which included whether: “(a) the valuation of the Fund’s aggregated investments in a portfolio company was currently written down in excess of 50% of the aggregate acquisition cost of the investments; (b) the valuation of the Fund’s aggregated investments in a portfolio company had been written down below its aggregate acquisition cost for six consecutive quarters; (c) the write-down was primarily due to the portfolio company’s weakening operating results, as opposed to market conditions or comparable transactions, or valuations of comparable public companies; and (d) the portfolio company would likely need to raise additional capital within the next twelve months.”[7]
• Portfolio Company Level v. Portfolio Investment Level. The Funds’ LPAs included separate definitions for “portfolio company” (i.e., “an entity in which a [p]ortfolio [i]nvestment is made by the [p]artnership directly or through one or more intermediate entities of the [p]artnership”) and “portfolio investment” (i.e., “any debt or equity (or debt with equity) investment made by the [p]artnership”). Further, the LPA provision governing permanent impairments indicated that they were to be assessed on a portfolio investment level rather than a portfolio company level (emphasis added).[8] The Commission took the position that Insight’s aforementioned evaluation criteria failed to honor this distinction and instead only analyzed the need for a permanent impairment at the aggregate portfolio company level.[9]

Taken together, the Commission found that these practices caused Insight to fail to permanently impair certain of their Funds’ assets to the correct extent. As a result, the Commission determined that Insight failed to adequately reduce the basis upon which post-commitment period management fees were calculated, and overcharged their investors.

II. Conflicts of Interest

In addition to the miscalculation of management fees, the Commission also found that the subjective nature of the criteria Insight used to determine whether a permanent impairment had occurred created a conflict of interest between Insight and its investors. Put differently, because Insight was the party ultimately determining whether to find a permanent impairment had occurred, Insight had the right to reverse any permanent impairment it had previously applied, and finding a permanent impairment had occurred would result in Insight collecting fewer management fees, it should have, at the very least, disclosed the existence of this conflict to its investors.[10]

III. Violations and Penalties

As part of its settlement with the SEC, Insight was ordered to reimburse its investors upwards of $4.6 million, corresponding to excess management fees charged and interest thereon, and was required to pay a civil penalty of an additional $1.5 million. It is also notable that although the Commission acknowledged Insight’s prompt remedial efforts (which included mid-exam reimbursement) and cooperation during the course of the investigation, they still decided to proceed with enforcement.

IV. Analysis & Key Takeaways

• When determining whether to find a permanent impairment, fund managers should consider listing the criteria they apply in the operative provisions of their LPA(s). Note also that if this practice is adopted, it will be imperative that fund managers adhere closely to the criteria included in the LPA.
• Though we expect criteria for finding a permanent impairment will always involve some level of subjectivity, including objective factors to the extent possible and/or involving a third-party valuation professional in the process could provide a meaningful level of enforcement risk mitigation. However, while the Order indicates that Insight did, to the satisfaction of the Commission, subsequently apply more objective criteria when determining the amount of management fees it had overcharged its investors, the Order provides no clear guidance as to what criteria the Commission considers sufficiently objective.
• In addition to common valuation related conflicts of interest disclosed in private placement memoranda and similar disclosure documents, fund managers should consider including explicit disclosure around the conflict of interest inherent in the fund manager deciding whether to permanently impair a fund’s assets when such decision would negatively impact the amount of management fees the fund manager would be owed.

V. Conclusion

The SEC’s recent settlement of its enforcement action against Insight reflects the overall trend towards increased scrutiny of the private funds industry generally, including pursuant to its increased rulemaking related to the same. More specifically, this emphasis on valuation and write-down practices is in harmony with the Commission’s 2023 Examination Priorities Report,[11] as well as other recently settled enforcement actions.[12] We expect this trend to continue.

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[1] Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Release No. 6332 (June 20, 2023), link.

[2] Id., Paragraph 1

[3] Id., Paragraph 11

[4] Id., Paragraph 11

[5] Id., Paragraph 14

[6] We note that the Order did not make it clear whether this four-pronged test was maintained or recorded by Insight in any formal investment or valuation policy, but the Commission did note that “Insight did not adopt or implement written policies or procedures reasonably designed to prevent violations of the Advisers Act relating to the calculation of management fees…” See Id., Paragraph 18.

[7] Id., Paragraph 15

[8] Id., Paragraph 12

[9] Id., Paragraph 16

[10] Id., Paragraph 17

[11] Securities and Exchange Commission, Division of Examinations, 2023 Examination Priorities, link.

[12] See e.g., Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Release No. 6104 (Sept. 2, 2022) (Finding that Energy Innovation Capital Management LLC, an exempt reporting adviser, improperly calculated management fees by failing to make adjustments for dispositions of its investments, which included any write-down in value of individual portfolio company securities, when the value of such securities provided the basis on which management fees were calculated, resulting in charging its investors excessive management fees), link; Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Release No. 5617 (Oct. 22, 2020) (Finding that EDG Management Company, LLC failed to write-down the value of certain of its portfolio securities as required by the applicable LPA, which resulted in overcharging management fees to its investors which were calculated using the value of such portfolio securities as the basis), link.

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Should you wish to review how your actual management fee calculations synch up with the mechanics set forth in your limited partnership agreement and disclosure set forth in your private placement memoranda, or if you have any questions about how best to prepare for examination scrutiny related to the same, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Investment Funds practice group, or the following authors:

Kevin Bettsteller – Los Angeles (+1 310-552-8566, [email protected])
Gregory Merz – Washington, D.C. (+1 202-887-3637, [email protected])
Shannon Errico – New York (+1 212-351-2448, [email protected])
Zane E. Clark – Washington, D.C. (+1 202-955-8228 , [email protected])

Investment Funds Group Contacts:
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, [email protected])
Albert S. Cho – Hong Kong (+852 2214 3811, [email protected])
Candice S. Choh – Los Angeles (+1 310-552-8658, [email protected])
John Fadely – Singapore/Hong Kong (+65 6507 3688/+852 2214 3810, [email protected])
A.J. Frey – Washington, D.C./New York (+1 202-887-3793, [email protected])
Shukie Grossman – New York (+1 212-351-2369, [email protected])
James M. Hays – Houston (+1 346-718-6642, [email protected])
Kira Idoko – New York (+1 212-351-3951, [email protected])
Eve Mrozek – New York (+1 212-351-4053, [email protected])
Roger D. Singer – New York (+1 212-351-3888, [email protected])
Edward D. Sopher – New York (+1 212-351-3918, [email protected])
William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

Earlier today, the Supreme Court released its much-anticipated decisions in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina.  By a 6–3 vote, the Supreme Court held that Harvard’s and the University of North Carolina’s use of race in their admissions processes violated the Equal Protection Clause and Title VI of the Civil Rights Act.  Chief Justice Roberts wrote the majority opinion.

Although the majority opinion does not explicitly modify existing law governing employers’ consideration of the race of their employees (or job applicants), the decisions nevertheless have important strategic and atmospheric ramifications for employers.  In particular, the Court’s broad rulings in favor of race neutrality and harsh criticism of affirmative action in the college setting could accelerate the trend of reverse-discrimination claims.

As a formal matter, the Supreme Court’s decision does not change existing law governing employers’ use of race in employment decisions.  But existing law already circumscribes employers’ ability to use race-based decision-making, even in pursuit of diversity goals.

I.  Background

Students for Fair Admissions (“SFFA”), an organization dedicated to ending the use of race in college admissions, brought two lawsuits that were considered together at the Supreme Court.  One lawsuit challenged Harvard’s use of race in admissions on the ground that it violates Title VI, which prohibits race discrimination in programs or activities receiving federal assistance (including private colleges that accept federal funds).  SFFA v. Harvard, No. 20-1199.  The second lawsuit challenged the University of North Carolina’s use of race in the admissions process on the ground that it violates the Equal Protection Clause, which applies only to state actors (e.g., public universities).  SFFA v. University of North Carolina, No. 21-707.  The plaintiffs argued, and the defendants did not meaningfully contest, that the law governing the use of race in college admissions under Title VI and the Equal Protection Clause is the same.

Prior to today’s decisions, the law governing colleges’ use of race in admissions was set forth in two Supreme Court cases decided on the same day in 2003: Grutter v. Bollinger, 539 U.S. 306 (2003), and Gratz v. Bollinger, 539 U.S. 244 (2003).  In Grutter, the Supreme Court upheld a law school’s consideration of applicants’ race as a “‘plus’ factor . . . in the context of its individualized inquiry into the possible diversity contributions of all applicants.”  539 U.S. at 341.  In Gratz, the Supreme Court struck down a university’s consideration of race pursuant to a mechanical formula that “automatically distribute[d] 20 points . . . to every single ‘underrepresented minority’ applicant solely because of race.”  539 U.S. at 271.

SFFA asked the Court to overrule Grutter and adopt a categorical rule that colleges cannot consider applicants’ race in making admissions decisions.  It also argued that Harvard’s and North Carolina’s use of race is unlawful even under Grutter because both colleges allegedly engage in racial balancing, discriminate against Asian-American applicants, and reject race-neutral alternatives that would achieve the colleges’ diversity goals.

II.  Analysis

A.  The Supreme Court’s Opinion

The Supreme Court held that both Harvard and UNC’s affirmative-action programs violated the Fourteenth Amendment’s Equal Protection Clause.  In a footnote, the Court explained that the Equal Protection Clause analysis applies to Harvard by way of Title VI, 42 U.S.C. § 2000d, which prohibits “any educational program or activity receiving Federal financial assistance” from discriminating on the basis of race.  Because “discrimination that violates the Equal Protection Clause of the Fourteenth Amendment committed by an institution that accepts federal funds also constitutes a violation of Title VI,” the Court “evaluate[d] Harvard’s admissions programs under the standards of the Equal Protection Clause.”

Applying strict scrutiny, the Court asked whether universities could “make admissions decisions that turn on an applicant’s race.”  The Court emphasized that Grutter, which was decided in 2003, predicted that “25 years from now, the use of racial preferences will no longer be necessary to further the interest approved today.”  The Court explained that college affirmative-action programs “must comply with strict scrutiny, they may never use race as a stereotype or negative, and—at some point—they must end.”

The Court then determined that Harvard and UNC’s admissions programs are unconstitutional for several reasons.  First, the Court concluded that universities’ asserted interests in “training future leaders,” “better educating [their] students through diversity,” and “enhancing … cross-racial understanding and breaking down stereotypes” were “not sufficiently coherent for purposes of strict scrutiny.”  Second, the Court found no “meaningful connection between the means [the universities] employ and the goals they pursue.”  The Court concluded that racial categories were “plainly overbroad” by, for instance, “grouping together all Asian students” or by employing “arbitrary or undefined” terms such as “Hispanic.”  Third, the Court held that the universities impermissibly used race as a “negative” and a “stereotype.”  Because college admissions “are zero-sum,” the Court held, a racial preference “provided to some applicants but not to others necessarily advantages the former group at the expense of the latter.”  Finally, the Court observed that the universities’ use of race lacked a “logical end point.”

The Court’s opinion employs broad language against racial preferences, reasoning that “[e]liminating racial discrimination means eliminating all of it.”  As such, universities and colleges can no longer consider race in admissions decisions (subject to a narrow exception for remediating past discrimination).  But the Court clarified that “nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise,” as long as the student is “treated based on his or her experiences as an individual—not on the basis of race.”  The Court also made clear, however, that “universities may not simply establish through application essays or other means the regime we hold unlawful today.”

The Chief Justice’s opinion for the Court was joined by Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett.  Justices Kagan, Sotomayor, and Jackson dissented.  Justices Thomas, Gorsuch, and Kavanaugh wrote separate opinions concurring in the Court’s decision.  Justices Sotomayor and Justice Jackson wrote dissenting opinions.

B.  Existing law governing reverse-discrimination claims against employers

Even prior to the SFFA decisions, an employer’s consideration of the race of its employees, contractors, or applicants was already subject to close scrutiny under Title VII and Section 1981.  “Without some other justification, . . . race-based decisionmaking violates Title VII’s command that employers cannot take adverse employment actions because of an individual’s race.”  Ricci v. DeStefano, 557 U.S. 557, 579 (2009).

Supreme Court precedent allows a defendant to defeat a reverse-discrimination claim under Section 1981 or Title VII by demonstrating that the defendant acted pursuant to a valid affirmative-action plan.  See, e.g., Johnson v. Transportation Agency, Santa Clara County, California, 480 U.S. 616, 626–27 (1987); see also, e.g., Doe v. Kamehameha Sch./Bernice Pauahi Bishop Estate, 470 F.3d 827, 836–40 (9th Cir. 2006) (en banc) (applying Johnson in Section 1981 case).  If a defendant invokes the affirmative-action defense (under Title VII or Section 1981), then the plaintiff bears the burden of proving that the “justification is pretextual and the plan is invalid.”  Johnson, 480 U.S. at 626–27.

“[A] valid affirmative action plan should satisfy two general conditions.”  Shea v. Kerry, 796 F.3d 42, 57 (D.C. Cir. 2015).  First, the plan must be remedial and rest “on an adequate factual predicate justifying its adoption, such as a ‘manifest imbalance’ in a ‘traditionally segregated job category.’”  Id. (quoting Johnson, 480 U.S. at 631) (alteration omitted).  “Second, a valid plan refrains from ‘unnecessarily trammeling the rights of white employees.’”  Shea, 796 F.3d at 57 (quoting Johnson, 480 U.S. at 637–38 (alterations omitted)).  A valid affirmative-action plan “seeks to achieve full representation for the particular purpose of remedying past discrimination,” but cannot seek “proportional diversity for its own sake” or seek to “maintain racial balance.”  Id. at 61.

In addition, plaintiffs alleging discrimination under Title VII or Section 1981 must show that they were harmed in some way.  For example, Title VII generally requires a plaintiff to show that discrimination affected “his compensation, terms, conditions, or privileges of employment.”  42 U.S.C. § 2000e-2(a)(1).  Courts often interpret this to mean a plaintiff must show a concrete and objective “adverse employment action,” e.g., Davis v. Legal Services Alabama, Inc., 19 F.4th 1261, 1265 (11th Cir. 2021) (quotation marks omitted), although other courts have indicated that in some circumstances less tangible harms might be sufficient, see, e.g., Chambers v. District of Columbia, 35 F.4th 870, 874–79 (D.C. Cir. 2022) (en banc).  Under these standards, many employers lawfully seek to promote diversity, equity, inclusion, and equal opportunity through certain types of training, outreach, recruitment, pipeline development, and other means.

III.  Implications for employers’ diversity programs

The Supreme Court’s decisions in the SFFA case were made in the unique context of college admissions and were based on the Equal Protection Clause, not Title VII or Section 1981, with the assumption, uncontested by the parties, that the analysis would be the same under both the Equal Protection Clause and Title VI.  As such, they do not explicitly change existing law governing reverse-discrimination claims in the context of private employment or private employers’ diversity programs for those private employers not subject to Title VI (i.e., those who do not receive qualifying federal funds).  Still, courts often interpret Title VI (at issue in the case against Harvard) to be consistent with Title VII and Section 1981, so there is some risk that lower courts will apply the Court’s decision in the employment context.  Justice Gorsuch’s concurrence highlights this risk, observing that Title VI and Title VII use “the same terms” and have “the same meaning.”

EEOC Chair Charlotte A. Burrows released an official statement stating that today’s decisions do “not address employer efforts to foster diverse and inclusive workforces.”  EEOC Commissioner Andrea Lucas published an article reiterating a view she has previously expressed, which is that race-based decisionmaking is already presumptively illegal for employers, and stating that the Court’s opinion “brings the rules governing higher education into closer parallel with the more restrictive standards of federal employment law.”  She recommended that “employers review their compliance with existing limitations on race- and sex-conscious diversity initiatives” and ensure they are not relying on “now outdated” precedent.

Against that backdrop, the Court’s decision could have important strategic and atmospheric consequences for employers’ diversity efforts.  The Court’s holdings likely will encourage additional litigation.  Plaintiffs’ firms and conservative public-interest groups likely will bring reverse race-discrimination claims against some employers with well-publicized diversity programs. Government authorities such as state attorneys general might also increase enforcement efforts.

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The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Blaine Evanson, Jessica Brown, Molly Senger, Matt Gregory, and Josh Zuckerman.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment or Appellate and Constitutional Law practice groups, or the following practice leaders and authors:

Labor and Employment Group:

Jason C. Schwartz – Washington, D.C.
(+1 202-955-8242, [email protected])

Katherine V.A. Smith – Los Angeles (+1 213-229-7107, [email protected])

Appellate and Constitutional Law Group:

Thomas H. Dupree Jr. – Washington, D.C. (+1 202-955-8547, [email protected])

Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])

Julian W. Poon – Los Angeles (+ 213-229-7758, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.